MAGENDRA SINGH RATHORE,ALWAR vs. DCIT CENTRAL CIRCLE-2, JAIPUR

4. The Id. AO further erred in law as well as on the facts of the case in charging interest u/s 234A and 234B of the Act. The appellant totally denies its liability of charging of any such interest. The interest so charged, being contrary to the provisions of law and facts, kindly be deleted in full.

5. The appellant prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing.” the assessee has raised following:- “1. The impugned order passed u/s 143(3) r.w.s. 153A dated 04.12.2019 is bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be quashed.

2. Rs. 10,00,000/-: The Id. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance made by the Id. AO u/s 57(iii) of difference of interest expenditure upto Rs. 10,00,000/- computed @ 10% (18% claimed less 8% allowed) as against the claim made u/s 36(1)(iii) and also without any justified basis. The Id. CIT(A) also seriously erred in recording incorrect and perversed finding of fact that no P/L account was filed and the computation do not show interest expenditure which is nothing but misconception of law once interest expenditure was debited to P/L account and net profit is the starting point, how the assessee could have once again shown/claimed the interest expenditure in the computation of total income separately. This is serious misconception of law and facts. The disallowance so made and confirmed, being contrary to the provisions of law and facts hence, kindly be deleted in full 3. Rs. 99,365/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the denial towards the deductions claimed under chapter VI-A upto Rs. 99,365/-. The denials of the deductions claimed & 483/JPR/2024 Sh. Magendra Singh Rathore and confirmed by the CIT(A) being contrary to the provisions of law and facts of the case. Hence,the same kindly be allowed in full.

4. The Id. AO further erred in law as well as on the facts of the case in charging interest u/s 234B of the Act. The appellant totally denies its liability of charging of any such interest. The interest so charged, being contrary to the provisions of law and facts, kindly be deleted in full.

5. The appellant prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing.”

3.0 At the outset of hearing, the Bench observed that there is delay of 4 days in filing the appeal by the assessee for which the ld. AR submitted a prayer to condone the delay which reads as under: “1. That in the aforesaid matter, the Id. CIT(A)-4, Jaipur passed the Order u/s 153C r.w.s. 143(3) on dated 06.02.2024 (hereinafter referred as "impugned order") and the same was received on mail on dated 28.02.2024, Accordingly, the appeal was to be filed on/before dt. 28.04.2024 however, the same has been filed on dated 10.04.2024. Thus, the appeal was filed within the time. However, considering the date of the order 06.02.2024 as date reciet there is minor 4 days. 2.1 Reasonable Cause Exist: In this connection, it is humbly submitted that the papers duly signed were handed to the audit staff namely in the office of the Id. counsel, however Mr. Akshansh Jain proceeded an outstation audit leaving behind a papers in a drawer which, came to the knowledge when the assessee enquired. The appeal, was immediately filed. 3.1 Supporting Case Laws: It is submitted that the Hon'ble Supreme Court in the case of Collector, Land & Acquisition v. Mst. Katiji & Others (1987) 167 ITR 471 (SC) has advocated for a very liberal approach while considering a case for condonation of delay. The following observations of the Hon'ble Court are notable: “The legislature has conferred the power to condone delay by enacting section 5 of the Limitation Act 1963 in order to enable the Courts to do substantial justice to parties by disposing of matters on merits'. The & 483/JPR/2024 Sh. Magendra Singh Rathore expression 'sufficient cause employed by the legislature is adequately elastic to enable the Courts to apply the law in a meaningful manner which sub serves the ends of justice that being the life-purpose of the existence of the institution of Courts. It is common knowledge that this Court has been making a justifiably liberal approach in matters instituted in this Court. But the message does not appear to have percolated down to all the other Courts in the hierarchy." The said judgment is a leading case on the subject and has a binding force on all the officers subordinate thereto. Also, in the case of India Capacitor Ltd. (1989) 180 ITR 641 (Cal. HC), Autoser (P.) Ltd. (1998) 101 Taxman 70 (Cochin) (Mag.) & Concord of India Insurance Co. Ltd. v. Smt. Nirmala Devi (1979) 118 ITR 507 (SC) 2.7 Thus, the minor delay in filing of the instant appeal was not at all deliberate or intentional but arose due to circumstances beyond the assesses control, who was not going to gain anything. It is, therefore, humbly prayed that: a. This application may kindly be allowed by condoning the delay, taking a sympathetic view, in the interest of justice. b. Any other order, which this Hon'ble ITAT deems fit and proper, be also passed in favour of applicant assessee.” Based on the above contention ld. AR of the assessee prayed to take sympathetic view in the interest of justice. 3.1 Ld. DR submitted that the reasons advance are not sufficient to condone the delay. But at the same time did not object to the facts so argued by the ld. AR of the assessee.

3.2 We have heard both the parties and perused the materials available on record. The bench noted that the assessee handed over the signed paper to the audit staff in the office of the counsel who then went on another assignment out of town and thereby & 483/JPR/2024 Sh. Magendra Singh Rathore there has been a delay of 4 days in filling the appeal. Based on the set of facts we concur with the submission of the assessee and condone the delay of 04 days in filing the appeal by the assessee as the assessee has sufficient cause.

We get support for taking a lenient view on the matter from the decision of the apex court in the case of Collector, Land & Acquisition Vs. Mst. Katiji& Others 167 ITR 471(SC) wherein it was directed the other courts to consider the liber approach in deciding the petition for condonation as the assessee is not going to achieve any benefit for the delay in fact the assessee is at risk.

4.2 On perusal of the profit and loss account the ld. AO noted the assessee has offered net interest income amounting to Rs. 72,343. The ld. AO asked to furnish the details of interest, income and interest expenditure so claimed, during the assessment proceedings as the assessee has shown interest expenditure which ld. AO asked the assessee to show cause as why same should not be disallowed for not being incurred, wholly and exclusively for the purpose of business. The assessee furnished explanation vide letter dated 25-11.2019 stating that they have availed a term loan amounting Rs. 1,00,00,000 from Malviya Urban Co-operative bank and that rate of interest on that loan was @ 18% per annum. Assessee has taken that loan in previous year which continued to current year. The loan was advanced to partnership firm of the assessee M/s. Goldendunes Homes LLP. That firm pays the assessee interest as per permissible rate of 12 % and assessee cannot charge higher interest for the investment & 483/JPR/2024 Sh. Magendra Singh Rathore made in that firm. Ld. AO considered the reply of the assessee but not found convincing by the assessing officer. He noted that no prudent person will take loan on higher interest rate and advance at lower rate so as to have the loss. Furthermore, the assessee is shown interest, receipt from partnership firm, ₹18,45,180. The ld. AO on perusal of the account of M/s. Goldendunes Homes LLP noted that from that firm the interest was given @ 8 % only. Thus, excess interest @ 10 % paid on loan of Rs. 1 cr obtained from Malaviya Urban Co-operative Bank for an amount of Rs. 10,00,000/- was considered to be excess claim and that claim of interest was disallowed as per provision of section 57(iii) of the Act and was considered as income of the assessee. The assessee has claimed deduction under chapter VIA for a sum of Rs. 1,50,000, however, as the assessee has not furnished the evidence in respect of LIC, Investment in Mutual fund and tuition fee etc., paid to justify the claim of deduction same was not allowed to the assessee. Apart from that 97,00,000/- was also added being the sale price of property.

& 483/JPR/2024 Sh. Magendra Singh Rathore 5. Aggrieved by the above order of the Assessing Officer the assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised by the assessee, the relevant finding of the ld. CIT(A) is as under:-

In this case the search action took place on 02.08.2017. Appellant had filed his original return of income u/s 139(1) of the Act, on 01.03.2017 for the AY 2016- 17 declaring a total income at Rs. 8,15,400/-. Therefore when the search action took place the time limit to issue notice u/s 143(2) of the Act was available. Accordingly, the case is to be considered in the The law is in this regard is settled that in case of abated assessments the assessment is not restricted in scope and the assessing authority can make the addition even without any incriminating material found during the search.

Thus there is no need to go into the merits of the argument of the appellant regarding the nature and extent of the material seized during the course of search and seizure action. Further the appellant has raised some legal issues which are not pertaining to the facts of the appeal. The appellant has also referred to merits of the additions which are dealt with in the specific grounds of appeal.

Accordingly, this ground of Appeal is hereby dismissed.

Ground No. 2.

It is noted by the ld. AO that on perusal of the profit and loss account of the assessee it is found that the assessee has shown interest income amounting to Rs 72343/- after netting the interest expenditure. The appellant submitted explanation dated 25-11-2019 that he had taken a term loan amounting to Rs. 1,00,00,000/- from Malviya Urban Cooperative bank @ 18% per annum in previous years which continued to current year also and the loan was advanced to partnership firm of the assessee M/s Goldendunes LLP @ 12% The Id.

& 483/JPR/2024 Sh. Magendra Singh Rathore AO has further stated that "the assessee has shown interest receipt from partnership firm at Rs. 18,45,180/- which is mere than Rs. 12,00,000/- if, the interest is charged @ 12% on Rs. 1,00,00,000/-. And also stated that "It will be worthwhile to mention here that during the course of scrutiny proceeding in the case of M/s Goldendunes Homes LLP wherein ledger account of the assessee found wherein in the narration interest has been charged at 8% only." From this it appears that appellant has shown interest income of Rs. 18,45,180 whereas the payer firm has booked interest of Rs. 8,00,000. It appears that appellant is receiving interest income from more than one partnerships. The appellant has not addressed the factual position in the submissions.

It is also noticed in the assessment order that "the assessee has shown loan and advances amounting to Rs 2,87,84,854/ in the balance sheet. The assessec asked for details of the loans and advances during the assessment stage. However, same was not furnished which clearly shows that the loan has been advance other than the partnership firm also and assessce failed to establish nexus that borrowed fund has been advanced to partnership firm". The appellant has not addressed the factual position in the submissions. The appellant has not furnished the details and how the loan to the firm was reflected if it was reflected) in the balance sheet of the appellant is not shown.

Apparently, the Id. AO has used the benchmark of 8% in view of facts not being made available and as there is no other basis made available.

I agree with the legal submissions of the appellant that if the appellant is substantive partner in M/s Goldendunes Homes LLP during the year under appeal and the loan was advanced to partnership for business purposes and the interest expense is claimed by the appellant as the business expense u/s 3 then the difference and resultant addition worked out by the id. AO in the assessment order would not be sustainable.

However in the present case the interest disallowance has been made u/s 57) of the LT. Act. The interest expense has not been claimed by the appellant as business expense. Other conditions discussed in pre- As per section 57, deduction of interest is available only when the assesse shows that interest expenses has been incurred wholly and exclusively for the purposes of earning the interest income chargeable under the head other sources.

If the loan has been given to further the business interest as is claimed in the present appeal such loan and pertaining interest cannot be said to be wholly and exclusively for the purposes of earning the interest income. Scope of section 57(ii) is narrower than section 36[1]/37(1) of the Act. It is held by the Hon'ble ITAT in the case of RRPR Holding (P.) Ltd. v. Deputy Commissioner of Income-tax [2023] 152 taxmann.com 537 (Delhi Trib.)/[2023] 201 ITD 781 (Delhi-Trib.)[22-06-2023] as under:-

19. Before the Tribunal, the Id. counsel has merely reiterated its contentions placed before the lower authorities without showing any nexus between the interest earned and corresponding interest expenditure as observed. The Revenue on the other hand has clearly recorded a finding of fact that the interest expenditure has not given rise to the corresponding interest income. The interest income has arisen independently out of fixed deposits fixed with bank, the source of which in turn is sale of investments. The interest expenditure on the other hand has been NEETU incurred on borrowers utilized for investment in acquisition of shares of NDTV Ltd. Thus, apparently the assessee has failed to discharge the onus which lays upon it to show that incurring of expenditure has resulted in corresponding income taxable under the head income from other sources. In the absence of any live nexus between the expenditure and the corresponding income, the Revenue Authorities have rightly disallowed the claim of interest expenses having regard to the narrower scope of deductions eligible under section 57(iii) of the Act. We thus decline to interfere with the action of the Assessing Officer and the First Appellate Authority.

In view of the above, this ground of appeal is hereby dismissed.

& 483/JPR/2024 Sh. Magendra Singh Rathore Ground No. 4 The Id. AO has disallowed of deduction claimed under chapter VI-A of the I.T. Act, amounting to Rs. 150000/- after observing that the assessee had not furnished evidence in respect of LIP, Mutual Fund and Tution fees for the year and the LIP furnished for Rs. 65635/- has not been paid during the year but on 13-02-2019. On perusal of submissions it is found that during the assessment proceedings the appellant had furnished the copy of LIP of Rs. 65,635/- before the Id. AO. On perusal of the premium certificate dated 13.02.2019 it is found that the date of payment mentioned in the certificate are 06.01.2015 and 25.01.2016. Hence it is appear that the Id. AO has not appreciate the fact that the payment has been made by the appellant during F.Y. 2015-16. Accordingly, the deduction under chapter VIA is allowed to the extent of Rs. 65,635 on this ground. The appellant has also submitted that the AO denied the eduction mainly on the ground that the supporting evidences were not submitted. The appellant has further stated that the matter was very old and it was difficult for the appellant to have produced each and every receipt and voucher in support of the deduction claimed. The appellant has claimed that some of the document has been submitted before the AO and some more supporting evidences are being A furnished now. No further evidences have been submitted. Having perused the submissions, no justification has been made out for making a case under Rule 46A in this regard. No relief is allowed in this regard. It is noted that during the assessment proceedings the appellant has not submitted any other documentary evidences regarding his claim of balance amount of Rs 84,635/-(1,50,000-65,635). Hence, the disallowance made by the AO is upheld extent to Rs 84,635/-- Accordingly, this ground of appeal is partly allowed.”

6. Feeling dissatisfied on the sustained addition, assessee preferred the present appeal on the grounds as stated herein & 483/JPR/2024 Sh. Magendra Singh Rathore above. In support of the grounds so taken by the assessee, the ld. AR for the assessee has submitted his written submission and the same reads as under:- “Brief General Facts: The assessee, an individual derives income from real estate business and income from other sources. The Appellant e- filed its return of income (ROI) u/s139 for the subjected Assessment Years on dates and declaring total income as shown in the chart in para 2.1 of this written submission.It appears that a Search & Seizure action u/s 132 of the Income Tax Act, 1961 (herein after referred to as “the Act”) was carried out by the Income Tax department on the members of Kiran Fine Jewelers Group on 02.08.2017 alleging that the assessee is one of the members of this group. However, the assessee was not a member but merely acting as Chief Financial Officer of FS reality group. A Search & Seizure was also carried out at the place of the appellant u/s 132 on 02.08.2017. There apart, a Survey u/s 133A of the I.T. Act was also carried out at business premises of one M/s F.S. Housing Private Limited, Jaipur during the course of which some papers were found and impounded and thereon impugned additions have been made. Accordingly, notices u/s 153A of the Act dated 11.01.2019 were issued to the assessee, in response to which return declaring the same total income as was declared in the original return was filed by the assessee on dated 12.02.2019. Subsequently, the AO issued notices u/s 142(1) dated 22.09.2019 seeking details and information from the assessee, in response to which the assessee filed various detailed submission taking legal and factual submissions/ objections with the alternative plea. The ld. AO however, not feeling satisfied with the explanations so furnished, made the additions and disallowances on account of: (i) Disallowance of interest expenditure u/s 57(iii). (ii) Denial of deductions claimed under Chapter VI-A Feeling aggrieved, the assessee filed appeal in CIT(A) but did not find his favor. Hence, this appeal. GOA 2: Disallowance of interest u/s 57(iii): (CIT(A) Pg.21 Pr.5.2) Facts: This aspect has been dealt with by the AO as under:

& 483/JPR/2024 Sh. Magendra Singh Rathore “7 Disallowance of interest expenditure On perusal of the profit and loss account of the assessee it is found that the assessee has shown interest income amounting to Rs. 72343/- after netting the interest expenditure. The assessee was asked to furnish detail of interest income and interest expenditure so claimed vide note sheet entry and show cause as how the interest expenditure is incurred wholly and exclusively for the purpose of business income or to earn interest income and show caused as why the interest expenditure should not disallowed for not been incurred wholly and exclusively for the business purpose or to earn interest income. In reply of the same the A/R of the assesee furnished written explanation dated 25-11-2019 wherein the assessee submitted that he had taken a term loan amounting to Rs. 1,00,00,000/- from Malviya Urban Cooperative bank @ 18% per annum in previous years which continued to current year also and the loan was advanced to partnership firm of the assessee M/s Goldendunes LLP @ 12% as partnership firm cannot charge interest more than 12%. The reply of the assessee is duly considered not found convincing as no prudent person will take loan on higher interest rate and advanced at lower rate to earned loss. Furthermore, the assessee has shown interest receipt from partnership firm at Rs. 18,45,180/- which is more than Rs. 12,00,000/- if, the interest is charge @ 12% on Rs. 1,00,00,000/- . It will be worthwhile to mention here that during the course of scrutiny proceeding in the case of M/s Goldendunes Homes LLP wherein ledger account of the assessee found wherein in the narration interest has been charged at 8% only. The scan copy of the same is as under: In addition to above the assessee has shown loan and advances amounting to Rs. 28784854/- in the balance sheet the assessee asked for details of the loans and advances. However, same was not furnished which clearly shows that the loan has been advance other than the partnership firm also and assessee failed to establish nexus that borrowed fund has been advanced to partnership firm. Hence it is evident that the argument given by the assessee is contrary to the fact and an afterthought and interest expenditure & 483/JPR/2024 Sh. Magendra Singh Rathore so claimed has not been incurred for the purpose of interest income and difference of interest expenditure at Rs. 10,00,000/- computed at @ 10% (18%-8%) of Rs. 1,00,00,000/- is hereby disallowed u/s 57(iii) of the I.T. Act and added to the total income of the assessee.” The CIT(A) also confirmed the disallowance made by the AO holding as under: “5.2….. I agree with the legal submissions of the appellant that if the appellant is substantive partner in M/s Goldendunes Homes LLP during the year under appeal and the loan was advanced to partnership for business purposes and the interest expense is claimed by the appellant as the business expense u/s 36 then the difference and resultant addition worked out by the ld.AO in the assessment order would not be sustainable. However in the present case the interest disallowance has been made u/s 57(iii) of the I.T. Act. The interest expense has not been claimed by the appellant as business expense. Other conditions discussed in pre-paragraph are also not satisfied. Hence the legal submissions made are not applicable to the facts of the case.” Hence this ground. Submissions: 1.1Finding of the AO, vague and contradictory: While making the impugned disallowance, the AO made the allegations that the argument given by the assessee is contrary to the fact and an afterthought.However, he completely failed to demonstrate as to what contrary he found in such contentions and what was the afterthought. The ld.AO asked the Assessee to furnish the details of the interest income and interest expenditure and secondly, how such interest was incurred wholly & exclusively for business purposes or to earn interest income, to which the assessee replied, vide letter dated 25.11.2019 (PB-5-10). Relevant part is reproduced for ready reference: “3. Explanation for interest expenses claimed against interest income: Below is the summary of interest income and interest expenses claimed by me, during the relevant assessment year (ledger of interest income and expenses is attached for your reference): Particulars Amount Interest received from Goldendunes LLP 18,45,180/- From our reply for AY 2015-16, it is evident that the term loan taken from MUCB bank has been utilized as follows:

S. Name of Person Amount Date of Rate of No. advanced advance interest, if any 1. Goldendunes Homes 40,00,000/- March Interest @ LLP 22, 2014 12% is charged.

2. Goldendunes Homes 60,00,000/- May 20, LLP 2014 Total 1,00,00,000/- During the year, I have paid interest amounting to Rs.18,49,269/- on MUCB term loan (Ledger and MUCB statement is attached). I have received interest amounting to Rs.18,45,180/- from Goldendunes Homes LLP (ledger of Goldendunes Homes LLP and interest calculation is attached for your reference). I have received interest amounting to Rs.76,432/- from Ramnath Buildcon (ledger of Ramnath Buildcon and interest calculation is attached for your reference). During the relevant assessment year, I was partner in Goldendunes Homes LLP. I have charged interest @12% on loan advanced to Goldendunes Homes LLP because as per Section 40(b)(iv), I cannot charge interest more than 12% from firm, otherwise the same would be disallowed and would be taxable in the hands of LLP. So, there is restriction on interest rate that can be charged by a partner from its loan in firm. Moreover, since I was partner in firm and my motive was to earn profit from investment in firm. The firm required fund for conduct of its business operations, then only my motive will get fulfilled. Therefore, I have loan from various sources and invested the same in firm so that I can get profit in future….”

& 483/JPR/2024 Sh. Magendra Singh Rathore Thus, the details of interest income and interest expenditure both, were duly supplied as required. 1.2. The appellant also submitted the purpose behind providing loan. However, the dispute was confined only to the interest paid or loan taken @18% from the bank and the same advance to a firm @12%, which was based on making the impugned addition. 1.3 The undisputed facts of the case are that the appellant, out of loan of Rs. 1,00,00,000/- taken from Malviya Urban Corporative Bank Ltd. (“MUCB” in short), was transferred to the M/S Goldendunes Homes LLP, a partnership firm wherein, the appellant continued as a partner having 35% of share. This is also not disputed that it was not a completely interest free loan advanced but the appellant did charge interest @ 8% p.a.. As per AO, the only dispute is that whereas, the appellant paid interest @ 18%, it charged only @ 8% from the said firm Goldendunes Homes LLP and therefore, the difference of 10% on the amount of Bank loan of Rs.1,00,00,000/- was disallowed by the AO u/s 57(iii) of the Act. 1.4 It may be clarified that the appellant had taken loans (with or without interest) from other sources also and had further advanced to said LLP. On 01.04.2015 there was an outstanding balance due from LLP at Rs. 27,45,601/- whereas, as on 21.03.2016 the same was of Rs.2,60,27,781/- which included the said Rs. 1 Crore also.

2. Loan advanced out of business expediency for business purpose and interest claimed exclusively for business purposes u/s 36(1)(iii) r/w 37(1) of the Act:It is submitted that the peculiar admitted facts of the case clearly shows that the loan so advanced to Goldendunes Homes LLP was given completely out of commercial expediency and such interest expenditure was incurred exclusively for business purposes falling u/s 36(1)(iii) and/or u/s 37(1) of the Act. The borrower was also a real-estate firm and the appellant became a partner right from the very inception i.e. from dated 19.09.2013was having substantial interest by holding initial 50% share and thereafter, 35% in A.Y. 2016-17 &A.Y. 2017-18in profit&loss of the firm. The said firm, was in need of finances towards its proposed or ongoing real- estate projects. The appellant, being a reputed person having knowledge and expertise in the field of real estate, instead of carrying out any real estate business individually on its own, decided to form an LLP (wherein he was holding 50% share and thereafter 35% in A.Y. 2016-17). Moreover, since the said borrower was in its initial stage and because of its weak financials and also because it was a new entrant in the real-estate business, the LLP was not able to get any loan/the loan of suitable amount from the banks.

& 483/JPR/2024 Sh. Magendra Singh Rathore On the other hand, Shri Magendra Singh Rathore was having good reputation in the real-estate field therefore it was arranged that the appellant should get loan from the bank from where it was practical and possible and to transfer the said loan to the borrower LLP. The appellant being a partner and having substantial share therein, it was not abnormal, to have agreed for the proposal. Unfortunately, the borrower having commenced from A.Y. 2014-15 was not doing well and started incurring huge losses which continued even in the subjected assessment A.Y. 2016-17& A.Y. 2017-18. This was a serious cause of worry for the appellant as to whether he would be able to recover back the huge amount of loans of Rs. 2.60 Cr transferred to the said borrower and having become apprehensive, the appellant now adopted a defence mode so that it could minimise the possible loss. The prime question for the appellant was of the recovery of the principal and thereafter the recovery of the interest at the desired/demanded rate. But finding the fact that the LLP was sinking and could have become bankrupt, the appellant had ultimately to compromise at whatever rate of interest the said borrower could pay the appellant. The borrower was having upper hand and the appellant stood like a beggar. In these peculiar fact & circumstances therefore charging of interest as the desired rate was secondary and the question of recovery of the principal amount was of prime importance. The Appellant therefore felt fortunate even in making recovery of the interest @ 8% (though agreed @ 12% as stated in the partnership deed). Continuing with this dilemma, the appellant ultimately had to leave the firm and finally in A.Y. 2017-18, he took retirement with effect from dated 15.02.2017. Fortunately, later on the appellant was able to get the principal amount (of Rs. 1,00,00,000/-) back from the borrower which was then repaid to the Malviya Urban Corporative Bank Limited. It cannot be denied that the Appellant, transferred the funds with the expectation of earning profits/huge profits from the projects with the borrower but by one reason or other, he ultimately failed and the appellant had to feel satisfied at the interest of 8% only as against 12%. It may be clarified that the borrower, being a firm could not have paid more than 12% as per the present tax laws therefore, the AO wrongly expected 18% and hence, there can’t be any accrual of income in the hands of the assessee of the balance 4%. Thus, the Appellant acted as a prudent businessman. In the peculiar circumstances the appellant did what any other prudent businessman could and should have done.

3. Notional charging of interest- not permissible: Even assuming, the appellant could have charged interest @ 12% or say @18% by passing necessary entries in its books of accounts and debiting the account of the said borrower but it could be a mere case of a hypothetical income & 483/JPR/2024 Sh. Magendra Singh Rathore and the law is well settled that income tax is a tax on real income but not on hypothetical income. Thus, by merely passing entries to please the income tax department was of no use. In this case, the AO made the disallowance of interest claimed by comparing the rate of interest 8% paid against 18% which the appellant should have charged in the opinion of the AO and therefore the differential rate of interest 10% has been disallowed. Thus, it is clear that AO wanted the appellant to charge interest @ 18% which it failed. It is submitted thatthe law is well settled that no interest can be charged on notional basis as held in the case of ShoorjiVallabdas& Co. 46 ITR 144 (SC) followed in Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 (SC). There is nothing to show on record that the appellant was bound or the borrower had agreed to make payment @ 18% to the appellant. Therefore, the AO could not have presumed more interest than agreed which amounts to taxation of the notional interest.

4. Businessman is the best judge: It will be appreciated that the decision has to what rate of interest should have been paid/charged, is a decision to be taken by businessman, who is the best judge to take care of its interest. The law is settled that the AO cannot sit on the arm chair of the businessman. The allowability of claimed interest therefore should have been allowed accordingly. For this proposition, kindly referJ.K. Woollen Mfg. vs. CIT [1969] 72 ITR 612 (SC).

& 483/JPR/2024 Sh. Magendra Singh Rathore Hence the impugned disallowances deserve to be deleted in full. GOA 3: Denial of deductions under Chapter VI-A:(CIT(A) Pg. 47 Pr. 7.2) Facts: This aspect has been dealt with by the AO as under: “9 The assessee has claimed deduction under chapter VI-A of the I.T. Act amounting to Rs. 150000/-. However, the assessee has not furnished evidence inrespect of LIP, Mutual Fund and Tution fees and the LIP furnished for Rs. 65635/-has not been paid during the year but on 13-02-2019 and same cannot be allowedduring the year. Hence the claim of deduction remains non substantiated by thedocumentary evidences which hereby disallowed and added back to the total income of the assessee.” The CIT(A) partly confirmed the denial towards the deductions to the extent of Rs. 84,635/- holding as under: “7.2… It is noted that during the assessment proceedings the appellant has not submitted any other documentary evidences regarding his claim of balance amount of Rs. 84,635/- (1,50,000- 65,635). Hence, the disallowance made by the AO is upheld extent to Rs 84,635/-.” Hence, this ground. Submission: 1. The following submission were made before the ld. CIT(A): “It is submitted that the AO denied the deduction mainly on the ground that the supporting evidences were not submitted. It may be appreciated that this is very old matter and it is difficult now for the assessee to have produce each and every receipt and voucher in support of the deduction claimed. Although the assessee has submitted some of the document before the AO and some more supporting evidences are being furnished now in the chart shown under: Chart showing documents for deductions claimed in various AY Date Amount Details PB FOR AY 2016-17 LIC OF VIKRAM SINGH 7.12.2015 8,808 89 RATHORE 25.01.2016 25,323 LIC OF MAGENDRA 88 & 483/JPR/2024 Sh. Magendra Singh Rathore SINGH RATHORE 6.5.2015 25,445 6.5.2015 2,727 6.5.2015 2,613 6.5.2015 2,509 6.5.2015 2,419 6.5.2015 2,337 6.5.2015 2,262 88 APPOLO MEDICAL 19.08.2015 12,507 90-91 INSURANCE 31.03.2015 35,300 TUITION CHALLAN 92 6.10.2015 35,300 TUITION CHALLAN 93 157,550 With a humble prayer to admit the same under Rule 46A because the facts are covered by the clauses thereof. However, taking a practical and sympathetic view, it is prayed that the deduction as claimed may be allowed. Because the assessee is being continuously making payment and sometime deduction is allowed and sometime denied for want of evidence. But continuity of the payment is not denied therefore, as a consistent practice, deduction may kindly be allowed fully.”

2. The ld. CIT(A) however appears to have ignored the same. He did not discuss the prayer so made nor he considered the evidence made before AO.Although, all the supporting evidence were furnished towards deduction of Rs.1,57,550/-. Hence, the deduction so claimed deserves to be allowed in full. The above submissions have been made based on the instructions and the information provided of/by the client.”

8. During the course of hearing, the ld. AR of the assessee in addition to the written submission vehemently argued that while examining the claim of interest receipt and paid, ld. AO failed appreciate the assessee has offered the interest income [ excess of interest income then paid ] under the head profit & gains of business or profession and not as other income as propose to add the interest u/s 57(iii) is against the provision of the law. It is not under dispute that money so borrowed by the assessee is invested in the firm M/s. Goldendunes Homes LLP. The ld. AO noted that the assessee is in receipt of interest @ 8% only whereas the assessee has paid interest @ 18% on a loan taken from Malviya Urban Cooperative Bank for an amount of Rs. 1,00,00,000/-. As & 483/JPR/2024 Sh. Magendra Singh Rathore loan was taken for the purpose of business, income is shown under the head profit and gains of business and profession the disallowance of alleged excess interest as per provision of section 57(iii) is not correct. When the matter was carried to ld. CIT(A), though he observed that the contention of the assessee has merits on the legal ground raised

but he has confirmed the finding of the ld. Assessing Officer only on the ground that there is no claim by the assessee as the interest paid under the head income from other sources and thereby addition was sustained by ld. CIT(A). To counter this facts, ld. AR of the assessee drawn our attention to page 6 of the paper book wherein the reply dated 25.11.2019 given to the Assessing Officer wherein all the details related to the claim was given, the relevant extract as explained is reproduced for the sake of brevity:-

3. Explanation for interest expenses claimed against interest income: Below is the summary of interest income and interest expenses claimed by me, during the relevant assessment year (ledger of interest income and expenses is attached for your reference): Particulars Amount Interest received from Goldenduness LLP 18.45.180/- Interest received from Ramnath Buildcon 76,432/- Less: Interest paid on MUCB term loan 18,49,269/- Net interest income shown in PL 72,343/- S. No. Name of person Amount Date of advance Rate of Interest, if any 1. Goldendunes 40,00,000/- March22,2014 Interest @ Homes LLP 12% is charged 2. Goldendunes 60,00,000/- March20,2014 Homes LLP Total 1,00,00,000/- During the year, I have paid interest amounting to Rs. 18,49,269/- on MUCB term loan (Ledger and MUCB statement is attached). I have received interest amounting to Rs.18,45,180/- from Goldendunes Homes LLP (ledger of Goldendunes Homes LLP and interest calculation is attached for your reference). I have received interest amounting to Rs.76,432/- from Ramnath Buildcon (ledger of Ramnath Buildcon and interest calculation is attached for your reference). During the relevant assessment year, I was partner in Goldendunes Homes LLP. I have charged interest @12% on loan advanced to Goldendunes Homes LLP because as per Section 40(b)(iv), 1 cannot charge interest more than 12% from firm, otherwise the same would be disallowed and would be taxable in the hands of LLP. So, there is restriction on interest rate that can be charged by a partner from its loan in firm. Moreover, since I was partner in firm and my motive was to earn profit from investment in firm. The firm required fund for conduct of its business operations, then only my motive will get fulfilled. Therefore, I have loan from various sources and invested the same in firm so that I can get profit in future. Further to substantiate my claim, I want to submit that in the case of Atir Textile Industries (P.) Ltd. Vs. Deputy Commissioner of Income-tax [2015] 55 taxmann.com 380 (Gujarat), Hon'ble Gujarat High Court held that: "Whether while considering assessee's case to extend benefit under section 57(ill) competent authority has to consider transaction as a whole and for that reason, competent authority cannot split transaction in more than one part and select any particular part so as to say that such port is illegal or illegitimate or impermissible and deny to extend benefit in respect of same - Held, yes"

& 483/JPR/2024 Sh. Magendra Singh Rathore "Whether even otherwise, once primary transaction of lending, borrowing and payment of interest was found to be genuine, merely because it resulted into less or equal amount of income, would not become a colourable device and consequently earning any disqualification - Held, yes" Further in the case of Commissioner of Income-tax Vs. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) Hon'ble Supreme Court has held that: “what section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure." You are requested to take above submission on record.”

8.1 As regards ground No. 3, the assesses has placed on record all the details related to deduction claimed under chapter VIA, however, he has no objection if the matter be remanded back to the file of ld. AO to verify the claim of deduction made by the assessee.

& 483/JPR/2024 Sh. Magendra Singh Rathore 9. Per contra, ld. DR relied on the finding recorded in the order of the lower authorities. The Ld. DR relying at page 21 in para 5.2 wherein ld. CIT(A) noted that as per provisions of section 57 of the Act as claimed of interest expenses is only available when the fact that the assessee shown that the interest expenditure has been incurred wholly and exclusively for the purpose of earning interest income chargeable under the head of income from other source and therefore, he has though this scope of Section 57(iii) is narrower than section 36(1)(iii)/37(1) of the Act and therefore, ld. CIT(A) has rightly sustained the addition. As regards ground No. 3, ld. DR has not raised any specific objection to restore the matter back to the file of the AO.

& 483/JPR/2024 Sh. Magendra Singh Rathore Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession; (ia) the amount of any premium paid by a federal milk co- operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society; (ib) the amount of any premium paid by any mode of payment other than cash by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by— (A) the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Government; or (B) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999); (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; (iia) [Omitted by the Finance Act, 1999, w.e.f. 1-4-2000;] (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :

As is not disputed that the money borrowed by the assessee were invested in the business of the assessee and since the section 36(1)(iii) of the Act do not cast any other responsibility upon the assessee the claim of interest on the amount borrowed for the purpose of investment made as partner of the firm cannot be denied to the assessee and that too in part.

& 483/JPR/2024 Sh. Magendra Singh Rathore Based on these observations ground no. 2 raised by the assessee is allowed. 12. Ground no. 1, being general in nature and therefore, does not require our adjudication.

In the result the appeal of the assessee is partly allowed.

In the result, the appeals of the assessee in and 483/JPR/2024 are partly allowed.