TULIP SHAPES & STRUCTURES (P) LTD,MUMBAI vs. IT WD 1(3)(3), MUMBAI

आदेश / O R D E R PER A. K. GARODIA, A. M.

1. The Ld. CIT (A) erred in law and facts upholding the assessment of interest income of Rs. 10,79,013/- under the head 'Income from other sources'. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.

4. The AO / CIT (A) failed to appreciate that assessee has commenced business of developers & builders and acquired land for the purpose and interest was earned by lending /deposit of borrowed funds. 5. The above grounds/sub-grounds are without prejudice to each other. 6. The appellate craves the leave to add, amend or alter all or any of the grounds of appeal.

2.1 Learned AR of the assessee placed reliance on the Judgment of Hon’ble Bombay High Court rendered in the case of CIT vs. Lok Holdings as reported in 189 Taxman 452 (Bombay) and submitted that as per this judgment, the income of the assessee on account of interest is assessable as business income and as a consequences, deduction is also allowable on account of interest expenditure. He also submitted that the Balance Sheet of the assessee company is available of page 1 of the paper book and from the same, it can be seen that the assessee is having Share Capital of only Rs. 1,00,000/- and there is debit balance of Rs. 1,99,433/- in Profit and Loss Account and therefore, there is no own fund of the assessee and entire fund available with the assessee is on account of Unsecured Loans of Rs. 11,78,31,843/- and therefore, even if the interest income is assessed as income from other sources, deduction should be allowed on account of interest expenditure incurred by the assessee u/s 57 (iii) because borrowed fund only was used for earning interest income.

2.2 In reply the Ld. DR of the revenue supported the orders of the authorities below. 2.3 He also submitted that as per Profit & Loss Account of the assessee available on page 2 of the paper book, there is no interest expenses debited in Profit & Loss Account and therefore, no such deduction is allowable. As regards the judgment of Hon’ble Bombay High Court cited by Ld. AR of the assessee rendered in the case of CIT vs. Lok Holding (supra.), he submitted that this judgment is not applicable because the facts are different. He pointed out that in that case, the assessee temporarily invested surplus funds in bank and other concerns but in the present case, the deployment of fund by the assessee in Loan and advances has not been a temporary deployment because such loan and advances advanced by the assessee are still continuing.

2.4 At this juncture, a query was raised from the Ld. AR of the assessee regarding the present status of loan and advances as shown in Balance Sheet of the present year as Current Assets of Rs. 4,57,40,154/- and in reply, it was agreed by the Ld. AR of the assessee that the same are still continuing.

2.5 I have considered rival submissions. First I examine the applicability of this judgment of Hon’ble Bombay High Court rendered in the case of CIT vs. Lok holding (supra) cited by the Ld. AR of the assessee. In that case, as per the facts noted by the Hon’ble High Court, the assessee invested surplus amount temporarily in the bank and other concerns and earned interest on such deposits, and the assessee offered such interest income under the head income from business whereas, the AO assessed the such interest income in that case as income from other sources. In the present case, the facts are different because in the present case, the loan and advances given by the assessee are not temporary because such loan and advances are still continuing as had been admitted by the Ld. AR of the assessee. Therefore, I hold that this judgment of Hon’ble Bombay High Court cited by the Ld. AR of the assessee is not applicable in the present case because the facts are different as noted above.

3.1 Therefore, ground no. 1 of the assessee is rejected because interest income is to be assessed as income from other sources in the facts of the present case.

3.2 Regarding ground no. 2, I find that that interest expenses is allowable u/s 57(iii) if the assessee can establish direct taxes between the interest expenditure and interest income. As per Balance Sheet of the assessee available on page 1 of the paper book, the assessee has a borrowed fund of Rs. 11,78,31,843/-and assessee has given Loans and advances of Rs. 4,57,40,154/- and assessee does not have any own funds. Under these facts, to the extent of interest on borrowed funds used for earning interest income, deduction of interest expenditure is allowable u/s 57 (iii).

3.3 Now regarding the argument of the Ld. DR of the revenue that no interest expenditure is debited in Profit & Loss Account, I find that the details of Work in Progress as on 31/03/2010 is available on page 5 of the paper book where, the assessee has added interest on loan taken Rs. 12,69,132/- and assessee reduced interest on loan given Rs. 10,79,013/-. This interest on loan is taxed by the A.O. but he has not allowed deduction for interest on loan taken Rs. 12,69,132/- 3.4 In my considered opinion, under these facts, this issue should go back to the file of the AO for fresh decision and deduction on account of interest expenditure should be allow to the assessee, to the extent the assessee can establish that the loan taken by the assessee on which interest was paid was used for earning interest income. This can be done by the assessee by establishing direct nexus between the loan taken on interest and loan given for earning interest and only to that extent, interest expenditure can be allowed as deduction u/s 57(iii). Accordingly I set aside the order of Ld. CIT(A) on this issue and restore the matter back to the file of the Assessing Officer for fresh decision in the light of above discussion after providing reasonable opportunity of being heard to the assessee. Ground no.2 is allowed for statistical purpose.

Order pronounced in the open court on 22nd December, 2015