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Income Tax Appellate Tribunal, MUMBAI BENCHES “F”, MUMBAI
Before: SHRI B.R.BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
Since both these appeals pertain to the same assessee, for the different assessment years and the issues are identical, the same were heard together and are being disposed of by this common order for the sake of convenience. Assessment Year: 2004-05
3. Brief facts which need necessary mention for disposal of the present appeal are that the appellant/assessee having rental income, business income and income from other sources, filed its return of income for the assessment year 2004-05, declaring the total income of Rs. 9,11,890/-. During the relevant period the appellant/assessee received an interest income of Rs.10,95,690/- and paid interest on borrowings from various creditors to the tune of Rs. 11,45,459/-. Since the assessee had invested Rs. 27,32,580/-as capital in M/s. Mayank Enterprise in which the appellant/assessee is a partner, the Assessing Officer disallowed the proportionate interest of Rs. 1,79,555/- u/s. 36(1)(iii) of the Income Tax Act 1961( in short ‘the Act’) Against the said Assessment order, the assessee filed first appeal before the Ld. CIT(A). The CIT(A) vide impugned order confirmed the addition made by the Assessing Officer holding that the assessing officer has given the specific reasons for making disallowance. Feeling aggrieved by the impugned order the assessee is in appeal before this tribunal. The assessee has challenged the impugned order on the following effective ground:-
1. “Ld. Appellate authority has erred in confirming the order of the ITO wherein ITO has made additions in respect of the interest paid on the borrowed funds amounting to Rs. 1,75,555/-”
The Ld. Counsel for the assessee submitted before us that as per the settled law the assessee is entitled for said claim as the expenditure in question was wholly and exclusively for the purpose of making and earning the income; the same was not in the nature of capital expenditure or of the nature of personal expenditure and the same was expended in the relevant previous year and not in prior or subsequent year.
5. The Ld. Counsel relying upon the ratio laid down by the Hon’ble Supreme Court in the case of M/s S.A. Builders [(2007) 1 SCC 781)] and by the Hon’ble jurisdictional High court in M/s Rajasthan Warehousing Corporation (242 ITR 450), submitted that the appellant’s case is covered by the aforesaid judicial pronouncements and as per the ratio laid down in the said cases the interest paid by assessee is an allowable expenditure. The Ld. Counsel further submitted that the ITAT Mumbai has decided the similar matter in favour of the assessee in case ITA No 1510/Mum/2013.
On the other hand Ld. DR relying on the concurrent findings of Assessing Officer and CIT(A), submitted that the appeal filed by the assessee has no merit and the same is liable to be dismissed.
We have heard the rival submissions and gone through the material placed before us in the light of the contentions of the parties. Admittedly, in the present case the assessee has invested Rs. 27,32,580/-in a partnership Firm in which the assessee is one of the partners and has not received any interest from the said company. In the light of the said facts, the sole issue before this Tribunal for determination is whether the Ld. CIT(A) has erred in confirming the addition made by the AO in respect of the interest paid on the borrowed funds amounting to Rs 1,75,555/-
The Hon’ble Supreme Court in M/s S.A. Builders vs Commissioner of Income Tax (supra) has held that interest paid on the assessee borrowed funds from the Bank cannot be disallowed merely because out of such fund advances as interest free loan were made to its sister concern (a subsidiary). The Hon’ble Court further held that 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 ordinarily be entitled to deduction of interest on its borrowed loans. The Hon’ble Supreme Court has further observed as under:-
“ We agree with the view taken by the Delhi High Court in Commissioner Income Tax vs Dalmia Cement (Bhart) Ltd.(2002)254 ITR 377, 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 itself),the Revenue cannot justifiably claim to put itself in the arm-chair 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 Income Tax 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 view point but that of a prudent businessman. As already stated above, we have to see the transfer of 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.”
In the light of the ratio laid down by the Hon’ble Supreme Court in M/s S.A. Builders vs Commissioner of Income Tax (supra), there is no merit in the contention of the Revenue that there was no commercial expediency to make investment of borrowed capital and that the assessee has not received interest thereon and for these reasons the assessee is not entitled for deduction on borrowed capital. Neither there is any evidence on record to rebut the contention of the assessee that the investment was made for the purpose of business nor the evidence suggest that the expenditure in question was in the nature of personal expenditure. In the absence of any cogent reason it cannot be concluded that there was no commercial expediency and the investment was not made for the purpose of business or profession within the meaning of section 36(1)(iii) of the Act. On the other since the assessee was supposed to take decision regarding ‘commercial expediency’ at the relevant time it can safely be presumed that the assessee had incurred the expenditure in question keeping in view the commercial expediency as a prudent businessman for the purpose of his business.
In view of the foregoing discussion in the light of the facts of the case and the ratio laid down by the Hon’ble Supreme Court in M/s S.A. Builders vs Commissioner of Income Tax (supra), we are of the considered view that the impugned order passed by the Ld. CIT(A) is not in accordance with the settled principles of law. We therefore, set aside the impugned order and allow the ground of the appeal of the assessee for the assessment year 2004-05. AO is directed to allow the deduction accordingly.
Assessment Year: 2008-09 The assessee has challenged the impugned order dated- 23/02/2012 passed by CIT(A)-24, Mumbai for the assessment years 2008-09 on the following effective ground:-
“Ld. Appellate authority has erred in confirming the order of the ITO wherein ITO has made additions in respect of the interest paid on the borrowed funds amounting to Rs. 4,16,586/-“
2. The facts of this appeal are identical to the appeal of the assessee pertaining to the assessment year 2004-05, (except the amount of addition confirmed by the CIT(A)). Therefore, we do not think it necessary to reproduce the same.
So far as the ground of appeal in this case is concerned the same is also identical to the ground of appeal in assessee’s own case for the assessment year 2004-05.
4. Since we have already allowed the appeal of the assessee for the assessment year 2004-05, we set aside the impugned order passed by the Ld. CIT(A) appeal in the present case and allow the appeal of the assessee for the assessment year 2008-09 being identical. AO is, therefore, directed to allow the deduction accordingly.
In the result, both the appeals filed by the assessee are allowed.
Order pronounced in the open court on 24thFebruary, 2016