VITHAL V. KAMAT,MUMBAI vs. DCIT 8(2), MUMBAI

We heard the parties and perused the record. The assessee derives income from salary, income business, income from long term capital gain and other sources. The first issue relates to the disallowance of interest expenditure u/s 36(1)(iii) of the Act. The AO noticed that the assessee has received income by way of income from consultancy, interest on capital share of profit, capital gain, other sources etc. During the year, the assessee had borrowed funds from various banks. Hence, the AO asked the assessee to prove that the borrowed funds were used for earning income. The assessee’s reply that it was used for his business, which includes hotel consultancy and trade mark, was not convincing to the AO. Hence the AO disallowed the interest claim of Rs.6,54,509/-. It was also confirmed by the Ld CIT(A).

The Ld A.R submitted that the assessee had availed interest free loan from Vithal Kamat (HUF) in the earlier years and the said loan was used for investing in group companies and for making other investments. The loans taken from various banks were used for repaying part of loan taken from Vithal Kamat (HUF). Accordingly he submitted that the interest expenditure has got connection with the activities carried on by the assessee. However, the Ld D.R pointed out that the interest expenditure is not related to the income declared by the assessee by way of consultancy etc.

Having heard rival submissions, we are of the view that there is no merit in the contentions of the assessee. The interest on loan borrowed to repay the existing loan is allowable as deduction only if it is shown that the earlier loan was used for the purpose of business. A perusal of Balance sheet of the assessee, which is placed at page 3 of the paper book, would show that the assessee has got huge investments in group companies and other companies. However, the income of the assessee consisted of consultancy fee, royalty income, trade mark fee, share of profit& interest on capital from firm, dividend income etc. The Ld A.R also fairly admitted that the funds were taken from Vithal Kamat (HUF) over the years in many instalments and they have been utilized for all the purposes. Thus, the exact utilization of loans taken from Vithal Kamat (HUF) could not be proved at this stage. Hence, as submitted by Ld D.R, the nexus of interest expenditure with the income earned by the assessee could not be established by the assessee. Under these set of facts, we are of the view that the Ld CIT(A) was justified in confirming the disallowance of interest expenditure.

The next issue relates to the disallowance made u/s 14A of the Act. The assessee had earned dividend income of Rs.22,10,345/-, but he did not make any disallowance u/s 14A of the Act. Hence, the AO worked out the disallowance in terms of Rule 8D of IT Rules at Rs.6,52,604/-, which consisted of interest disallowance of Rs.3,70,778/- and expenditure disallowance of Rs.2,81,826/-. The Ld CIT(A) deleted the interest portion of disallowance, since the interest expenditure had already been disallowed u/s 36(1)(iii) of the Act. However, he sustained the disallowance of Rs.2,81,826/- relating to expenditure disallowance.

The Ld A.R invited our attention to the profit and loss account of the assessee and submitted that major expense claimed by the assessee is only professional charges of Rs.3,15,500/-. Other expenses consisted of membership fee, profession tax and depreciation. Accordingly he submitted that the assessee has not claimed any expenditure which could be related to the dividend income. Accordingly, he submitted that the expenditure of Rs.2,81,826/- computed in terms of Rule 8D(2)(iii) is not warranted at all. 7. We heard Ld D.R and perused the record. We find merit in the contentions of the assessee, since the expenditure claimed by the assessee consisted of professional fee paid, finance charges, profession tax, membership fee, depreciation and miscellaneous expenses of Rs.500/- . The finance charges was disallowed u/s 36(1)(iii) of the Act and hence the same has already been excluded by the Ld CIT(A). The remaining expenses, in our view, could not be linked to the dividend income. Hence we agree with the contentions of Ld A.R that no disallowance of expenditure is called for in terms of Rule 8D(2)(iii) of the I.T Rules. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance of expenses ofRs.2,81,826/- confirmed by Ld CIT(A) u/s 14A of the Act. 8. In the result, the appeal filed by the assessee is partly allowed.