SHRI NISHIT KANTILAL SAVLA,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-CIRCLE 27(2), MUMBAI

In response to the show-cause notice before the ld. AO, assessee submitted as under:- “In respect of your notice u/s 142(1) dated 07/01/2020, we hereby submit as follows: 1. Following are the details of Income from other sources for AY 2018-19: Person or Amount/Income Nature of Respective entity from receipt documentary whom income evidence is received from Nishit Kantilal Savla Integrated 4,52,326 Interest Ledger Coreinfra income account Limited attached Integrated 14,13,628 Interest Ledger Spaces income account Limited attached Dividend 45,586 Dividend Ledger Income income account Exempt u/s attached 10(34) Interest 23,142 Bank interest Bank received from statement bank attached Shreeji 5,00,000 Ledger Construction account attached

The assessee is a partner in Savla Associates. During the AY 2018-19, the assessee had received remuneration from Savla Associates amounting to Rs 47,74,799/- and the assessee had paid Rs 76,06,272/- interest on capital to Savla Associates @ 9% p.a. We are enclosing the ledger account of Savla Associates for AY 2018-19 highlighting the interest expense. Since the income tax return did not accept the deduction of interest expense of 76,06,272/- from remuneration income of Rs 47,74,799/-, the assessee had shown the interest expense under the head income from other sources. Following is details of interest income and expense for AY 2018- 19: Sr. No Particular Interest Amt Interest from Loan and Advances Nishit Kantilal Savla 1 Integrated Coreinfra Limited 4,52,326 2 Integrated Spaces Limited 14,13,628 Total interest income 18,65,954 Less Interest Expense u/s 57 1. Savla Associates 76,06,272 Net interest income 57,40,318 The interest expenses were incurred in connection with the Tome earned hence the interest expenses are allowable as expenses u/s 57 of the Income Tax Act, 1961, 3. We are enclosing the ledger account of Savla Associates for AY 2018-19.

The ld. AO also did not allow deduction against interest on partner’s capital received from M/s. Sadgurukrupa Developers of Rs.25,61,206/- on which assessee has claimed deduction of interest payment on the interest received from the capital of the firm. Thus, the ld. AO did not allow the claim of deduction of Rs.57,40,318/- claimed u/s.57.

The ld. CIT(A) too has confirmed the said addition and he noted the figures of balance sheet as on 31/03/2008 wherein the he has observed and held as under:- 4.1.3 The appellant has paid interest on the amount borrowed from M/s. Savla Associates, a firm in which the appellant is a partner. The amount of borrowings from the firm outstanding as on 31-03-2018 is Rs.4,74,06,183/- (circled in the figure above). A Nishit Kantilal Savla sum of Rs. 76,06,272/- has been paid as interest on these borrowings from the firm. A closer examination of the balance sheet of the appellant would reveal that this sum borrowed from M/s. Savla associates has been deployed in various assets shown on the right side of the balance sheet The primary asset for which the funds have been deployed is the investment in shares of Indian Co. amounting to Rs.6.26,16,659/-(circled in the figure above). Thus, it can be seen that the funds on which interest has been paid during the year has been utilised for making Investments in the shares of Indian Co. amounting to Rs.6,06,16,659/-, No income has been earned during the year from such investment in shares. Therefore, there is no merit in the claim of expenditure of interest u/s 57 during the year. When there is no direct nexus shown between the funds which earned the interest income and the funds utilised for earning such income, no deduction can be allowed. When the borrowed funds have been deployed for investment in the shares of Indian Co. and other purposes, they cannot be said to be utilised for providing loans and advances which have yielded interest income during the year. Though it can be inferred that, the entire borrowed funds have been deployed for investment in the shares of the India Co. and other purposes, the Assessing Officer has been very fair and has allowed deduction of interest to an extent of Rs. 18,65,954/-. Effectively, he has considered a portion of the borrowed funds to have been deployed for providing loans and advances which have yielded interest income during the year. Accordingly, the order of the Assessing Officer calls for no interference. This ground of appeal of the appellant is dismissed. 4.2 Ground no.02 raised by the appellant relates to the grievance of the assesee that the Assessing Officer has not allowed any deduction against the interest on partner's capital received from the firm M/s Sadguru Krupa Developers admitted under the head Business Income. During the year, the appellant has admitted interest income received on capital from the firm M/s Sadguru Krupa Developers of Rs.25,61,206/- The appellant claims that the Nishit Kantilal Savla interest payments made to M/s Savla Associates shall be allowed as a deduction against this income. Under the head Business Income, in terms of Section 37 of the Act only those expenditure which are wholly and exclusively incurred for the purpose of the business are allowed as a deduction. As discussed in paragraph 4.1 of this order, the borrowed funds have been utilised for the purposes of investment in shares of the Co, and not for investing in the capital of the partnership firm M/s Sadguru Krupa Developers That being the case, interest expenditure cannot be allowed as an expenditure. This ground of appeal

Thus, if assessee had secured and unsecured loans of more than Rs.1.83 Crores and capital account of more than Rs.3.86 Crores and also capital from the partnership firm then to presume that all the loans taken from M/s. Savla Associates has been deployed only for shares of the Indian Company so as to disallow the claim of interest cannot be fully justified. If the case of the ld. CIT(A) is that the borrowed funds have been deployed for investment in shares from which no income has been earned and therefore, the claim of interest paid cannot be allowed, then in that case the only provision on which disallowance can be made on account of interest is u/s.14A. It is not the case of the ld. AO or ld. CIT (A) that interest has been disallowed by invoking the provision of Section 14A. Be that as maybe it is an undisputed fact that assessee has deployed the funds for running income either by way of interest or by way of income Nishit Kantilal Savla from other sources as stated in the letter filed before the ld. AO incorporated in the foregoing paragraph 4, then interest expenditure incurred has to be allowed. The interest has been paid to the partnership firm as per the terms and conditions provided in the partnership deed and if the capital has been withdrawn and used for earning of interest or for strategic investment, then same has to be allowed. As long as there is a nexus between the income earned by that in the form of interest or dividend, this is taxable under the head ‘income from other sources, then expenditure incurred for earning such income has to be allowed. Accordingly, we hold that interest paid has to be allowed or netted off against the interest income.

Since we have allowed the claim of interest in the computation of income, the ground No.2 also gets covered in that.

In the result, appeal of the assessee is allowed.