JAY MANUFACTURING COMPANY LTD,MUMBAI vs. ITO 10(2)(1), MUMBAI

This is an appeal filed by the assessee against the order of CIT(A)- 17, Mumbai dated 28/12/2016 for A.Y.2012-13 in the matter of order passed u/s.143(3) of the IT Act.

The only grievance of assessee relates to disallowance of interest expenditure of Rs.7,19,910/- u/s.57(iii) of the IT Act.

Rival contentions have been heard and record perused. Facts in brief are that the assessee company is a Private Limited company and is builder and developer. The assessee had e-filed its return of income for A.Y.2012-13 on 14.12,2012 declaring total income of Rs.Nil. The said return was processed u/s. 143(1) of the Act. Subsequently, the case was M/s. Jay Manufacturing Co. Pvt. Ltd., selected for Scrutiny Assessment which was assessed by AO at a total income of Rs.7,19,910/-. During the course of scrutiny, the AO observed that the assessee company has received interest bearing unsecured loan for the purpose of utilizing them for business activity. However, borrowed funds taken for business were diverted to advance loan to two firms. In other words, the company was paying interest as well as well as receiving interest and after netting the same, it was transferred to work in progress. However, the AO declined netting of interest expenditure against the interest income on the plea that amount was borrowed for the purpose of business, therefore, cannot be allowed as deduction against the income which is chargeable under the head ‘income from other sources’.

By the impugned order, CIT(A) confirmed the action of the AO.

I have considered rival contentions and carefully gone through the orders of the authorities below. I had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR during the course of hearing before us.

There is no dispute to the fact that first assessee has borrowed funds on interest and thereafter the same fund was given as advance on interest. The funds so advanced earned interest income and assessee has claimed deduction of interest paid on the borrowed funds against such interest income. U/s.57(iii) any expenditure incurred wholly and exclusively for earning such income is to be allowed against the income so earned. In the instant case, interest income was earned by advancing the funds which the assessee has borrowed at interest. Under these facts