KAVITA MARKETING P. LTD,MUMBAI vs. ITO WD 6(2)(4), MUMBAI

PER D.T.GARASIA, AM

1. “On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the further disallowance of interest of Rs. 48,89,648/- on restricting the interest expense to the extent of interest income, stated as under:-

Interest paid as per P&L A/c Rs. 1,15,82,972/- Less:- Voluntarily disallowed in ROI Rs. (35,45,901) --------------------------- Interest claimed by the appellant Rs. 80,37,071/- Less:- Interest Income Rs. 31,47,423/- ----------------------------- Further interest disallowed in assessment Rs. 48,89,648/- ===============

3. At the outset, the Ld. Counsel for the assessee submitted that he is not pressing ground No. 2 & 3, hence, we dismiss ground No. 2 & 3 as not pressed.

The assessee is in the business of Trading in properties and marketing in goods. From the perusal of the return of income filed, it was found that the assessee had received interest income of Rs. 31,47,423/-. The assessee had offered the interest received under the head of Business & Profession and not under the head of Income from other sources. In response to the show cause notice issued to the assessee, the assessee had further submitted that the interest income is taxable under the head income from other sources when there was parking of short term parking of surplus fund, when it is direct outcome of business, it should be taxed under the under the income from Business & Profession. The assessee further stated that the borrowed funds were used to generate interest earning loans and advances which establishes direct nexus hence interest expenses and income is to be rightly set off. The assessee is in the business of Trading in properties and marketing of goods and not in the business of money lending. The assessee’s contention was that the surplus funds was parked for earning the interest was not denied but the interest earned was to be taxed under the head of income from other sources. The assessee preferred appeal before the CIT(A) and the Ld. CIT(A) after considering the submission of the assessee, dismissed the appeal filed by the assessee.

“57. The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely:— (i) ….. .…. (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;”

From a plain reading of the same, it can be concluded that following are the requirements to claim an expenditure u/s 57(iii):- i) The expenditure should be incurred solely for earning such income. ii) It should not be in the nature of capital expenditure iii) It should not be in the nature of personal expense. iv) It should be incurred in the relevant accounting year.

If all the above conditions are fulfilled, the assessee is eligible to claim the expenditure irrespective of the amount of expenditure involved. Our view is fortified by judgment of Apex court rendered in CIT Vs. Rajendra Prasad Moody (supra) where the apex court held that legitimate expenditure incurred by assessee for the purpose of earning of income are allowable notwithstanding the fact that whether that purpose has been fulfilled or not. There is no requirement that the purpose should fructify into any benefit by way of return in the shape of income so as to claim the expenditure. It is not necessary that any income should in fact have been earned as a result of the expenditure. The deduction of the expenditure cannot be held to be conditional upon the making or earning of the income. Accordingly, we are of the considered opinion that legitimate expenditure incurred by assessee for the purpose of earning income are allowable u/s 57(iii) notwithstanding the amount of actual income earned by the assessee. Having said so, we proceed to compute the interest disallowance on the basis of facts and circumstances of the case. For this, it would be necessary to appreciate the capital structure of the company as on the last date of the impugned financial year which is extracted below:-

Capital Structure As on 31/03/2007 Liabilities Lacs Assets Lacs Owner's Equity & non interest bearing funds -Share Capital 5.00 Interest Bearing Loans & Advances 872.36 -Reserves & Surplus 4.09 Fixed Assets & Net Current Assets 13.97 -Ezra Trading & Finance Co. Ltd 7.00 Accumulated Losses 199.62 -Security Deposit 110.00 126.09 TDS & Security 24.13 1110.08

Non Interest Bearing Loans & 544.26 Interest Bearing Loans -Secured Loan from HDFC Bank 1585.76 Share Application money -Unsecured Loan from Shubh Shanti 15.00 Shares Investments 83.76 628.02 -Interest Due on unsecured Loan 11.25 1612.01 TOTAL 1738.10 TOTAL 1738.10

The assessee has claimed interest expenditure of Rs.176.62 Lacs on interest bearing funds obtained amounting to Rs.1600.76 Lacs (excluding interest due) on which average interest rate works out to be Rs.11.03%. Against those funds, non interest bearing funds / Share application money advanced by assessee amounts to Rs.628.02 Lacs. Applying average interest rate of 11.03% on this amount, proportionate interest disallowance comes to be Rs. 69.27 Lacs out of which the assessee has made suo-moto disallowance of Rs.59.29 lacs thereby leaving a balance of Rs.9.98 Lacs. Therefore, as against the claim of the assessee for Rs.117.33 Lacs, AO had restricted the same to Rs.74.46 Lacs, thereby disallowing Rs.42.87 Lacs. Against Rs.42.87 Lacs, the assessee shall suffer disallowance for Rs.9.98 Lacs as held by us and accordingly, the remaining claim for Rs.32.89 Lacs shall be allowed to the assessee. The appeal of the assessee is partly allowed.

Judgment pronounced in open court on 31st March, 2017.