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Income Tax Appellate Tribunal, “F”, BENCH MUMBAI
Before: SHRI JASON P. BOAZ, AM & SHRI SANDEEP GOSAIN, JM
PER SANDEEP GOSAIN,JUDICIAL MEMBER:
The present appeal has been filed by the assessee against the order of the learned CIT (A)-18, Mumbai dated 11-07-2014 passed in appeal No.CIT(A)-18/ITO 8(3)(4)/IT-255/13-14 for assessment year 2011- 12 on the grounds mentioned herein below:-
“1.1 Appellant submits that the Ld. CIT(A) has erred in confirming the disallowance of interest expenditure of Rs. 16,96,898/ - though the same was incurred wholly and exclusively for the purpose of earning interest income. Appellant therefore prays that the said disallowance of interest expenditure is unwarranted and unjustified and the same be deleted. 2.1 Appellant submits that CIT(A) has erred in holding that AO has rightly disallowed the interest of Rs.16,96,898/- paid to Saraswat Co-op. Bank Ltd. Therefore) Appellant prays that the claim of the assessee be allowed u/s 57 of the I.T. Act, 1961 3.1 Without Prejudice to the above) Appellant submits that so as to keep the source of earning intact) the expenditure so was incurred in wholly and exclusively to earn fixed deposit interest income. Hence, Appellant prays that interest deduction be allowed against interest income.
4.1 Without Prejudice to above) Appellant submits that CIT(A) had failed to appreciate that had assessee not made Fixed Deposit and obtained overdraft) it would lent the money directly) in which case there would have been no interest income on Fixed Deposit and no interest expense on Overdraft. Therefore) mode of lending should not prejudice the Appellant's claim of deduction.
5.1 Without prejudice to the above, Appellant submits that interest income of Rs. 17,86,597/- was earned from loans given as against this, interest of Rs. 16)96)898/- was paid by the assessee. Appellant submits that the A.O has erred in holding that there is no nexus between the expenditure laid out for the purpose of earning such income. Hence) the said disallowance is unjustified and unwarranted and same should be deleted.
6.1 Without prejudice to the above Appellant submits that she has not utilized loan of Saraswat Co-op Bank for advancing it to interest free funds hence) CIT(A) has erred in holding that present case is squarely covered by the order passed by Ld. CIT(A) for A.Y 2009- 10. Therefore, the said disallowance is unjustified and same should be deleted 6.1 Appellant submits that the (IT (A) has not construed the provisions of law and case laws on the subject) hence the said disallowances are contrary to the provisions of law and therefore it should be set aside.
7.1 Appellant craves leave to add) alter) omit or modify any of the grounds of appeal as the occasion may arise or demand.”
Later on, the revised grounds were also filed by the assesee which are as under:
“1.1 Appellant submits that CIT(A) has erred in not allowing set-off of the interest income of Rs.19,46,578/- received on Fixed Deposit kept with the Saraswat Co-Operative Bank as against the Interest paid of Rs.16,96,890/- paid to Saraswat Co-Operative Bank on overdraft facility obtained from the said bank.
2.1 Without Prejudice to above, Appellant submits that CIT(A) had failed to appreciate that if Appellant would not have made Fixed Deposit and obtained overdraft, it would lent the money directly, in which case there would have been no interest income on Fixed Deposit and no interest expense on Overdraft. Therefore, mode of lending should not prejudice the Appellant's claim of deduction.
3.1 In alternative and without prejudice to above, the Appellant is in the business of money lending and consequently, interest paid of Rs.16,96,890/- be allowed as a deduction u/s 36(1)(iii) of Income Tax Act, 1961.
4.1 Appellant craves leave to add, alter, omit or modify any of the grounds of appeal as the occasion may arise or demand.”
2. The brief facts of the case are that the return of income was e-filed on 30/07/2011 declaring total income at Rs.28,45,750/-. The same was processed u/s 143(1) of the Income Tax Act,1961. Later on the case was selected for scrutiny and statutory notices u/s 143(2) of the I.T. Act was issued and duly served upon the assessee. After seeking reply from the assessee, assessment order u/s 143(3) of the I.T. Act was passed by AO thereby disallowing interest expenses claimed u/s 57 of the I.T. Act as well as disallowed expenditure u/s 14A of the I.T. Act,1961. Aggrieved by the order of the AO the assessee carried the matter in appeal before the learned CIT (A) and the learned CIT (A) vide order dated 11.07.2014 dismissed the appeal filed by the assesee. Aggrieved by the order of the learned CIT (A), the asessee is now in appeal before us on the aforementioned ground.
Ground No.1.1
This ground relates to not allowing set off of the interest income of Rs.19,46,578/- received on fixed deposit kept with the Saraswat Co- operative Bank as against the interest paid of Rs.16,96,890/- paid to Saraswat Co-operative Bank on overdraft facility obtained from the said bank. At the very outset, ld. AR appearing on behalf of assessee submitted before us that this ground of appeal is squarely covered by Hon’ble ITAT in for Assessment Year 2009-10 in assessee’s own case. In this respect our attention was drawn to page no. 18 to 34 of the paper book wherein the said copy of the order passed in ITA No.215/Mum/13 for assessment year 2009-10 has been placed on record. We have analysed the orders passed by Hon’ble ITAT in assessee own case i.e. ground no.1.1 has already been dealt by the co- ordinate bench of Hon’ble ITAT in para 10 and the operative portion of the said order is reproduced below:
“10. We have considered the rival submissions and carefully perused the relevant material on reocord as well the case laws relied by rival parties. After considering the provisions of section 56 and 57 of the Act and also the decisions relied upon by both the parties, we hold that the expenditure(other than capital expenditure) shall be allowable only if it is incurred for the purpose of earning income and not vice-versa as held by the Hon'ble Supreme Court in the case of CIT v ... V. Gopinathan (supra) . Hence as per ratio of Hon'ble Supreme Court decision in V Gopinathan (supra) case, the netting of interest expenditure against interest income from FDR cannot be allowed as the expenditure of interest incurred by the assessee is not wholly and exclusively laid out or expended for making or earning income as per mandate of Section 57(iii) of the Act rather it is vice versa. At this juncture, it is apt to refer section 57(iii) of the Act, which reads as under:
"Sec. 57 : The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely:
(i) to (ii)
(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."
The assessee has-taken FOR of Rs.2 crores on which the assessee has earned interest income of Rs.16.14 lacs I the assessee has availed overdraft to the tune of Rs 1.87 crores from SCBl on the security of FOR of Rs 2 crores on which interest of Rs 16,68,880 has been paid to SCBL. The said amount so overdrawn from SCBl of Rs 1.87 crores is directly utilized by the assessee to give interest free loans of Rs 98 lacs to PMIPl and Rs 92 lacs to GFl, thus revenue has proved direct nexus of grant of interest free loans out of interest bearing overdrawn amount from SCBl and the reliance of the assessee on the case of Reliance Utilities and Power Limited (supra ) is misconceived as the presumption therein is rebutted. The assessee has raised the plea for the first time before us that she has given the interest free loan of Rs. 98 lacs to GPl as a measure of commercial expediency because she is the Director of the said company. However the said plea has not been verified by the authorities below. We, therefore, hold that to the extent of borrowing made from SCBl for lending to GPl of Rs. 98 lacs, the interest attributable thereof paid to SCBl shall be allowable to be set off against the interest income if the assessee is able to prove before the assessing officer that the said interest free loan of Rs. 98 lacs given to GPl has been given as a measure of commercial expediency as held by the Hon'ble Supreme Court it the case of S.A Builders (supra) and hence to that extent we allow the appeal subject to verification by the assessing officer and accordingly set aside the matter to the file of assessing officer for necessary verification as detailed above and the assessee will be given proper and adequate opportunity in accordance with the principles of natural justice. Relevant extracts from the decision of Hon'ble Supreme Court decision in S A Builders Limited (supra) are extracted below for ready reference:
"16. We have considered the submissions of the respective parties. The question involved in this case is only about the allow ability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High 'Court as well as the authorities below on the aforesaid question was not correct.
In this connection we may refer to section 36(1)(iii) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') which states that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the income-tax under section 28 of the Act.
In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this court held that the expression ''for the purpose of business" occurring under the provision is wider in scope than the expression ''for the purpose of earning income, profits or gains ". and this has been the consistent view of this court.
In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the IT authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister-concern (a subsidiary) on interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency.
In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is ''for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression ''for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
Thus in Atherton v. British Insulated & He/shy Cables Ltd. (1925) 10 Tax Cases 155 (HL), it was held by the House of Lords that in order to claim a deduction; it is enough to show that the money is expended. not of necessitv and with a view to direct and immediate benefit but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this court in several decisions e.g. Eastern Investments Ltd. v. CIT (1951) 20ITR 1 (SC), CITv. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) etc.
In our opinion, the High Court as well as the Tribunal and other IT authorities should have approached the question of allow ability of interest on the borrowed funds from the above angle. In other words the High Court and other authorities should have enquired as to whether the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency and if it was, it should have been allowed.
The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs (or the purpose of business. The expenditure may not have been incurred under any legal obligation, but vet it is allowable as a business expenditure ifit was incurred on grounds of commercial expediency.
No doubt, as held in Madhav Prasad Jatia v. CIT (supra), if the borrowed amount was donated (or some sentimental or personal reasons and not on the ground of commercial expediency. the interest thereon could not have been allowed under section 36(l)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency.
Thus, the ratio of Madha v. Prasad Jatia's case (supra) is that the borrowed fond advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(l)(iii) of the Act.
In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister-concern was by way of commercial expediency.
It has been repeatedly held by this court that the expression ''for the purpose of business" is wider in scope than the expression ''for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC), CIT v. Birla Cotton Spinning & Weaving Mills Ltd. (1971) 82ITR 166 (SC), etc.
The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister-concern. and what the sister-concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done.
It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest-free loan to its sister- concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister- concern as a measure of commercial expediency.
Learned counsel for the revenue relied on a -Bombay High Court decision in Phaltan Sugar Works Ltd. v. CIT (1994) 208ITR 989 (Bom) in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct.
Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT (1995) 215 ITR 582 (Bom) also does not appear to be correct.
We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itselj), the revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed
funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister- concern. It all depends on the (acts and circumstances of the respective case. For instance. if the directors of the sister-concern utilize the amount advanced to it by the assessee (or their personal benefit. obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.
However, the interest expenditure paid to SCBl and attributable to the advance of Rs. 92 lacs given to PMIPl shall not be allowed as expenditure to be set off against the interest income from FDR as per reasoning given by us above and hence the contention of the assessee to this extent is rejected. We order accordingly.”
After analyzing the afore mentioned order we are of the considered view that the present issue i.e. ground no.1.1 has been considered by the co- ordinate bench of Hon’ble ITAT and the said issue was decided against the assessee. However, since the assessee had raised plea for the first time before the Hon’ble ITAT in the said in respect of the fact that the assessee has given interest free loan of Rs.98 lacs to GPL as a measure of commercial expediency as the assessee was the director of the said company. Therefore, Hon’ble ITAT in the afore mentioned ITA No.215/Mum/13 A.Y.2009-10 has held that the extent of borrowing made form SCBL for lending to GPL of Rs.98 lakhs, the interest attributable thereof paid to SCBL shall be allowed to be set off against the interest income if the assessee is able to prove before the assessing officer that the said interest free loan of Rs.98 lakhs given to GPL has been given as a measure of commercial expediency as held by the Hon’ble Supreme Court in the case of S.A. Builders and therefore, to that extent the Hon’ble ITAT had allowed the appeal of the assessee subject to the verification by the assessing officer. Since the similar issue has again been raised before us in the present appeal therefore, following the principles of natural justice and respectfully following the judgements of assessee in assessee’s own case we also decide this issue accordingly.
However, during the course of arguments, ld. AR submitted that some of the loan amount has already been returned back by GPL and the said arguments were also raised by the assessee before the CIT(A) but no clear findings have been given by CIT(A). After considering the submissions of ld. AR and after hearing ld. DR on the said ground we are of the considered view that on the same ground the matter has been set aside for necessary verification in therefore we also set aside the matter to the file of the AO with the direction to verify the details and also to verify as to how much amount has been paid back by GPL and after verifying the details, the AO is directed to allow the proportionate interest to be set off against the interest income. If the assessee is able to prove before the AO that the said interest free loan of Rs.98 lakhs given to GPL has been given as a measure of “commercial expediency” as held by the Hon’ble Supreme Court in the case of S.A.
Builders (supra). Needless to mention that the assessee will be given proper and adequate opportunity in accordance with the principles of natural justice. Therefore we order accordingly.
Ground NO. 2.1 & 3.1
Since, the matter has been adjudicated while deciding the ground no.1.1 therefore the present ground no.2.1 &3.1 become academic in nature and hence, there is no need to adjudicate the said ground separately. Hence these grounds are dismissed.
Ground no. 4 is general in nature and needs no separate adjudication in view of the decision on above ground.
In the result, the appeal filed by the Assessee is partly allowed for statistical purposes. Order pronounced in the open court on 25-05-2016.