ASHISH ANAND,NEW DELHI vs. DCIT, NEW DELHI

The only issue involved in this appeal relate to the disallowance of the sum of Rs.5,58,515/- claimed by the assessee as an expenditure incurred for the purpose of earning the interest income u/s 57 of the Income-tax Act, 1961 (hereinafter ‘the Act’).

The brief facts of the case are that the assessee has taken the loan of Rs.2 crores from M/s. Kotak Mahindra Bank @ 18% interest per annum and unsecured loan of Rs.1.75 crores @ 9% interest per annum from other persons. The assessee has given the entire loan taken from the bank as well as from the other persons to M/s. Delhi Art Gallery Pvt. Ltd. for its potential growth at the same rate of interest @ 18% and 9% per annum. The assessee has received the interest of Rs.32,76,737/- and claimed expenses against this at Rs.38,35,252/- u/s 57 of the Act which consist of loan processing charges amounting to Rs.3,30,900 and penal interest amounting to Rs.2,27,615/- paid to M/s. Kotak Mahindra Bank. The AO disallowed the said sum of Rs.5,58,515/- by observing that neither the bank charges nor the penal interest was incurred for the purpose of earning interest income. When the matter went before the CIT (A), the CIT (A) dismissed the appeal of the assessee.

I have heard the rival contentions and carefully considered the same along with the orders of the tax authorities below. The facts of the case reveal that the loan taken by the assessee from Kotak Mahindra Bank and from other parties were advanced to Delhi Art Gallery Pvt. Ltd. on which the assessee earned the interest income amounting to Rs.32,76,737/-. While taking the loan form Kotak Mahindra Bank, the assessee paid loan processing charges amounting to Rs.3,30,900/- and also paid penal interest amounting to Rs.2,27,615/-. Both the processing charges and penal interest has been paid by the assessee in connection with the loan taken from Kotak Mohindra Bank and the amount so paid, in my opinion, had to be regarded as interest within the meaning of section 2(28A) of the Act which defines the interest payable in any manner in respect of any money borrowed and includes any service fee or other charges in respect of the money borrowed. The processing charges paid by the assessee as well as the penal interest relate to the money borrowed from Kotak Mahindra Bank. The expenses so incurred have been laid out or expanded wholly and exclusively for the purpose of making or earning such income i.e. the interest income. The claim of the assessee, in my opinion, falls u/s 57 (iii) and the expenditure incurred by the assessee cannot be regarded to be in the nature of a capital expenditure. The authorities below are not correct by holding that these expenses have not been incurred for the purpose of earning the interest income. Without paying the processing charges, the assessee could not have received the loan and the penal interest is part of the interest paid as per the terms and conditions on the basis of which the loan has been sanctioned by Kotak Mahindra Bank. My aforesaid view is duly supported by the decision of Hon’ble Supreme Court in the case of CIT vs. Rajender Prasad Modi – 115 ITR 519 on which the AR has vehemently relied. I, therefore, set aside the order of the CIT (A) and delete the disallowance of Rs.5,58,515/-.

In the result, the appeal of the assessee is allowed. Order pronounced in open court on this 17th day of February, 2016.