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Income Tax Appellate Tribunal, ‘C’ BENCH,KOLKATA
Before: Shri Partha Sarathi Chaudhury & Shri Dr. Arjun Lal Saini
ORDER Per Shri Partha Sarathi Chaudhury, JM:
This appeal preferred by the assessee emanates from the order of the Ld. Commissioner of Income Tax (Appeals) in short [ Ld. CIT(A), Central-II, Kolkata dated 17-12-2013 on the following grounds:- 1. For that on the facts and in the circumstances of the case and in law, the AO as well as the CIT(Appeals) erred in making disallowance of interest of Rs.29,39,127/-.
2. For that on the facts and in the circumstances of the case and in law, the AO as well as the CIT(Appeals) failed to appreciate that the advances were given by the assessee out of commercial & business expediency to companies/concerns and therefore the interest of Rs.29,39,127/- was allowable as deduction while computing his income.
3. For that on the facts and in the circumstances of the case and in law, the AO as well as the CIT(Appeals) failed to appreciate that the assessee was a promoter having substantial stake/interest in the companies/concerns to which advances were given and therefore the advances were made out of pure business interests and accordingly the interest of Rs.29,39,127/- paid on loans for making such advances was deductible while computing the taxable income of the assessee.
Vineet Mohan Gupta 4. For that on the facts and in the circumstances of the case and in law, the AO may kindly be directed to delete the impugned disallowance of Rs.29,39,127/- in full.
For that the appellant reserves the right to add to, alter or amplify the above grounds of appeal.
Though the assessee has preferred multiple grounds of appeal, the crux of the issue is the disallowance of interest of Rs.29,39,127/-. Hence, all the grounds nos. 1 to 4 shall be adjudicated collectively herein. Ground no.5 is general in nature. Hence, needs no adjudication.
The brief facts appearing in this case are that the assessee filed his return of income for the assessment year under consideration i.e 2011-12 manually on 23-07-2011 declaring a total income of Rs.14,92,301/-. The case was selected for scrutiny under CASS. Thereafter, notices u/s. 143(2) and 142(1) of the Act were issued to the assessee along with the questionnaire. In response to which, the ld.AR of the assessee appeared from time to time and furnished details and explanation. During the course of assessment, the AO observed that the assessee had income under the head ‘Salary’ and ‘Income from other sources’. As per balance sheet, the assessee has taken unsecured loan on which interest of Rs.29,39,127/- was paid. This interest amount was claimed as deduction from the ‘Income from Other Sources’. On examination of accounts, it was observed by the AO that the unsecured loan taken and interest paid on the same and the income declared by the assessee has no correlation with each other. In other words, the AO was of the view that the unsecured loan was not utilized by the assessee to earn interest income. Therefore, the payment of interest and income from other sources or salary has no nexus whatsoever with each other. The AO questioned the assessee that since the payment of interest has no relation with the earning of income,
Vineet Mohan Gupta then as to how the interest payment shall be deductible from the income of other sources. It was submitted before the AO that the loan taken was utilized in new business and reflected the same in the new business having a big potential to generate profits in future. However, the contention of the assessee was not accepted by the AO. It was observed by the AO that as per balance sheet the assessee has reflected the amount towards Loan & Advances of Rs.75,90,000/- to M/s. JRG Centre of Learning, Rs.19,42,103/- to M/s. JRG Developers Pvt. Ltd, Rs.68,64,762/- to M/s. Jagdishraiji Gita Devi Foundation and Rs.16,164/- to M/s. Jain & Company. The AO was of the opinion that all the above parties are separate entities having separate business operation or activities. These entities may have a big potential to generate profits in future but how can the assessee’s income be impacted in their profits? The assessee could not give reply to these queries and it was held by the AO that the interest payment of Rs. 29,39,127/- has no relation with the source of income of the assessee. The loan taken by the assessee had been advanced to other entities without interest and himself paid the interest on loan. Thus, the AO disallowed the payment of interest of Rs.29,39,127/- and added the same to the total income of assessee.
At the appellate proceedings before the CIT-A, it was contended by the assessee that the AO passed the order u/s. 143(3) of the Act wherein he made disallowance of interest amounting to Rs.29,39,127/-. This order passed by the AO is in contravention and violation of the direction of the CBDT vide Instruction no. 225/26/206-ITA-II (PT) dated 18.09.2010. Before him the assessee further placed his reliance on the decisions in the cases of Crystal Phosphates Ltd vs. ACIT, passed in November, 2012, CIT vs. Smt. Nayana
Vineet Mohan Gupta P. Dedhia, 270 ITR (AP) and Ajanta Financial Services Pvt. Ltd vs. ITO Ward 4(3), Kolkata ‘B ‘Bench dated 21.05.2012. In view of the above, it was pleaded before him that the order passed by the AO was beyond jurisdiction and therefore, disallowance of interest made by the AO should be deleted.
5. The CIT(A) in his order while considering the submissions of the assessee and perusing the assessment order observed that the AO has made the disallowance of Rs.29,39,127/- on account of interest on unsecured loan. It was observed in the course of appellate proceedings that the assessee did not submit any explanation with reference to merits of disallowance made by the AO. The assessee only concentrated on the technical issue. The ld. CIT(A) held that the instruction issued by the CBDT for selection of cases for scrutiny is an internal matter and an assessee cannot look into the same. Further, on perusal of instruction of the CBDT relied upon by the assessee, it was observed that it has no application for the cases which were selected for scrutiny under CASS. The said instruction was with reference to the cases selected for scrutiny on the basis of AIR returns or manual selection. Therefore, the reliance of the assessee on the aforesaid instruction of Board is misplaced and is of no help to him. The ld. CIT(A) in his order further stated that the judicial decisions in the case of Crystal Phosphates Ltd., Smt. Nayana P. Dedhia and Ajanta Financial Services Pvt. Ltd (supra) relied upon by the assessee are not applicable to the facts of his case. Because these cases relate to the instruction issued by the Board for manual selection of cases under scrutiny. In the case of the assessee the case was settled for scrutiny under CASS. Therefore, the claim of the assessee that the AO has travelled beyond his jurisdiction by making disallowance on account of interest is rejected by the ld. CIT(A). On merits, the Vineet Mohan Gupta ld. CIT(A) held that on perusal of balance sheet of the assessee as on 31-03-2011, it is observed that the assessee had taken unsecured loan of Rs.2,68,29,950/- from Jagannath Rice mills. The interest of Rs.29,39,127/- was paid to the said concern and debited to the P & L A/c. It is stated in the order by the CIT(A) that in course of assessment proceedings it was observed the assessee had given loan and advances of substantial amounts to JRG Centre of Learning, JRG Developers Pvt. Ltd & Jagdishraiji Gita Devi Foundation. The assessee did not charge any interest from the said concerns and trust. In the course of assessment proceedings it was contended before the AO that the loan taken was utilized in new business, which have a big potential to generate good profits in future. However, the assessee could not explain that as to how such profit earning capacity of these concerns was going to have any impact on the total income of the assessee. Further, one of the entities to whom substantial amounts are given by the assessee is a trust. That, as on record, the assessee could not explain that as to how a non- profitable organization can generate the profit affecting the total income of the assessee. The ld. CIT(A) further stated in his order that the AO has rightly held that the payment of interest has no nexus with the income earned by the assessee. In the computation of income the assessee has claimed deduction of Rs.29,39,127/- under the head ‘Income from Other Sources ‘. However, as per the provisions of the Act, the deduction u/s. 57(iii) of the Act can only be allowed if the expenditure is incurred wholly and exclusively to earn such income and the expenditure has direct nexus with the said income. But in the case of assessee he has failed to substantiate his claim u/s. 57(iii) of the Act.
Vineet Mohan Gupta 6. The ld.CIT(A) in his order has relied on the cases of CIT (Central), Kanpur vs. Smt. Swapna Roy reported in 331 ITR 367(All) and CIT vs. Punjab State Warehousing Corporation 177 Taxman 237(P&H), wherein the essence of provision of section 57(iii) of the Act was discussed and dealt with and on the basis of facts and legality involved in the case of the assessee, the CIT(A) held that the disallowance of Rs.29,39,127/- made by the AO is confirmed.
On being further aggrieved, the assessee has preferred this appeal before us.
At the time of hearing before us the ld. AR of the assessee argued by relying on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Rajeev Lochan Kanoria reported in 208 ITR 616 (Cal HC), wherein the ratio laid out that where the assessee has advanced interest free loans and/ or made investments in controlled companies or concerns which he manages, administers & finance for business/professional purposes, then any interest corresponding to such loans/investments is allowable as being incurred for business purposes. The ld.AR of the assessee put forth the decision of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works reported in 224 ITR 627 (SC), the ratio laid down therein and held that if the assessee has sufficient interest free funds available to meet the cost of interest free advances and investments and at the same time the assessee had also raised interest bearing loans then it can be safely presumed that the advances were from the interest free funds available. In support of his contention/submission, the ld.AR of the assessee has also filed before us the copy of balance sheet of assessee and copy of Deed of Trust dated 12th day of March, 2007 of Jagdish Rai Ji Gita Devi Foundation and copy of order dated 23rd Sept, 2016 of ITAT,
Vineet Mohan Gupta Delhi Bench, ‘F ‘, New Delhi in the case of Sh. Raj Kumar Jain Vs. DCIT, Cir 24(1), New Delhi in for the AY 2008-09. The contention of the AR was that at the time of hearing before us that in the case of Raj Kumar Jain, which also referred to the case of Rajeev Lochan Kanoria (supra) relief was granted to assessee. That Deed of Trust of the said Jagdish Rai Ji Gita Devi Foundation is a private trust and not a public trust as has been claimed by the departmental authorities. He further contended that the Balance Sheet, P & L A/c and other documents as and when called for by the AO were filed evidencing the business activities.
On the other hand, the ld.DR argued that the case laws as relied on by the assessee they are substantially different in facts from the assessee’s case. Therefore, they are not applicable. He further argued that there is no business activity of the assessee and assessee has no controlling of shares. There was no fund flow statement filed by the assessee at the time of assessment. Therefore, the ld.DR placed his reliance on the orders of the authorities below.
We have perused the case records, facts and circumstances of the case. We have heard the rival submissions and we arrive at our considered view that the unsecured loan taken and interest incurred on the same has no nexus whatsoever with the income of the assessee i.e salary and income from other sources. The loans and advances as reflected in the asset side of the balance sheet of assessee as is reproduced in the order of CIT(A) and on record shows that all the parties are separate entities having separate business operation or activities. Therefore, the question remains that these entities may have a big potential to generate profits in future but how can the assessee’s income be impacted
Vineet Mohan Gupta by their profits. On perusal of the said Trust Deed it is clearly written the Settler is creating a public trust that the object clause clearly spells out that this trust is created for the ultimate well being of the society and contention of the ld.AR is that it is private trust does not hold good. That even the case laws relied upon by the ld.AR are substantially different on facts as compared to the case of the assessee and hence, has no application in the given scenario. Therefore, it is clearly evident from the facts on record that the interest expense of Rs. 29,39,127/- has no relation whatsoever to the earning of income of the assessee. The unsecured loan taken by the assessee has been given as advanced to other entities having no bearing on the assessee’s income for the year under consideration. The benefit of Section 57(iii) of the Act can be availed if the investment is justified. In this case, there is no material on record to establish that the expenditure of the assessee is done bonafide to earn income. Therefore, the deduction u/s. 57(iii) of the Act is not applicable. In the case of assessee he has failed to bring any material on record to establish that the expenditure on account of payment of interest was done bonafide to earn income. Hence, no deduction can be allowed u/s. 57(iii) of the Act. Therefore, the disallowance of Rs.29,39,127/- made by the AO and confirmed by the CIT(A) on this issue is hereby sustained. We order accordingly. Ground nos. 1 to 4 of assessee’s appeal are liable to be dismissed.
In the result, the appeal of the assessee is dismissed. Order pronounced in the open Court on 06-02-2017