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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, JM &DR. A.L.SAINI, AM
O R D E R
PER DR. A. L. SAINI, ACCOUNTANT MEMBER:
Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2015-16, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)-1,Surat [in short “the ld. CIT(A)”] in Appeal No. CIT(A), Surat-1/10530/2017-18 dated 18.07.2019, which in turn arises out of an order passed by the Assessing Officer under section143(3)of the Income Tax Act, 1961 [hereinafter referred to as the “Act”].
Grounds raised
by the assessee are as follows: “1. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in partly confirming the action of assessing officer by sustaining the disallowance of interest expense of Rs.3,44,516/- out of total disallowance of Rs.5,40,627/- without appreciating the fact that the interest expense is not attributable to the business shown u/s 44AD.
2. Without prejudice to the above ground, CIT(A) ought to have given further relief to the extent of higher profit shown by the assessee than 8% as prescribed u/s 44AD.
3. It is therefore prayed that assessment framed u/s 143(3) of the Act may kindly be quashed and/or addition made by assessing officer may please be deleted.
4. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.”
Assessment Year. 2015-16 MadanlalMulchandas Jariwala 3.Succinct facts are that assessee before us is an individual and is engaged in the business of jarikasab for which he declares income under section 44AD of the Act. In addition to this, the assessee has commission income, rental income and interest income, which is declared by him under relevant, heads. There is no dispute on this. The assessing officer has not disturbed the incomes declared under any other head except income declared under the head income from other sources. The fact is that assessee has shown interest income of Rs.1,96,111/- against which he has claimed interest expense of Rs.5,40,627/-. The assessing officer did not agree to it, and has disallowed the amount of Rs.5,40,627/-,on the basis that no additional expenses can be claimed after adopting section 44AD of the Act.
On appeal, ld CIT(A) partly allowed the appeal of the assessee. The ld CIT(A) reduced the disallowance to the extent of interest income earned of Rs.1,96,111/-, and disallowed the balance of Rs.3,44,516/- (Rs.5,40,627- Rs.1,96,111). Aggrieved, the assessee is in further appeal before us. 5.We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record.Shri Mehul R. Shah, Learned Counsel for the assessee, submitted before the Bench that assessee is having two businesses.The business income, of the first business has been shown by the assessee under section 44AD of the Act, vide paper book page no.8. In second business, the assessee is earning interest income out of the fund advanced by him and the same is being shown by him under the head “income from other sources”. Learned Counsel pleads that under the head “income from other sources”, the assessee is showing rent income and interest income to the tune of Rs.1,96,111/- and has claimed the interest expenses to the tune of Rs.5,40,627/-. The ld Counsel also states that assessee is also earning the commission which is being shown by him under the head “income from other sources” and claimed the expenses in respect of the commission Page | 2 Assessment Year. 2015-16 MadanlalMulchandas Jariwala earned. Therefore, those incomes which have been shown under the head “income from other sources”, the assessee has been claiming separate deduction under section 57(iii) of the Act. To prove his stand, Learned Counsel submitted before us, the Profit and Loss Account of Sunshine Corporation and balance sheet of Sunshine Corporation (vide pb 10-11). The ld Counsel submitted the ledger account of Sunshine Corporation which is placed at paper book page no.
The ld Counsel also submitted the personal balance sheet of assessee wherein assessee claimed the interest expenses to the tune of Rs.5,43,864/- (vide pb-13).
Based on the above noted facts, we are of the view that if the assessee has shown the income under the head “income from other sources”(in addition to the income declared under section 44AD of the Act), then the assessee is entitled to claim the deduction of interest expenses or other expenses which the assessee has incurred to earn said income shown by him under the head “income from other sources” . In this regard, the reliance can be placed on the judgment of the Hon`ble Supreme Court in the case ofCIT vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC), wherein the Hon`ble Court observed as follows: “The revenue being aggrieved by the decision of the Tribunal made an application in each case for reference of the following question of law, namely: "Whether, on the facts and in the circumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under s. 57(iii)?" And since there was divergence of judicial opinion on this question, the Tribunal referred it directly for the opinion of this court. The determination of the question before us turns on the true interpretation of s. 57(iii) and it would, therefore, be convenient to refer to that section, but before we do so, we may point out that s. 57(iii) occurs in a fasciculus of sections under the heading, "F—Income from other sources". S. 56, which is the first in this group of sections, enacts in sub-s. (1) that income of every kind which is not chargeable to tax under any of the heads specified in s. 14, Items A to E, shall be chargeable to tax under the head "Income from other sources" and sub-s. (2) includes in such income various items, one of which is "dividends", Dividend on shares is thus income chargeable under the head "Income from other sources". S. 57 provides for certain deductions to be made in computing the income chargeable under the head "Income from other sources" and one of such deductions is that set out in cl. (iii), which reads as follows:
Assessment Year. 2015-16 MadanlalMulchandas Jariwala "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 expenditure to be deductible under s. 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. The argument of the revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income. The making or earning of income, paid the revenue, was a sine qua non to the admissibility of the expenditure under s. 57(iii) and, therefore, if in a particular assessment year there was no income, the expenditure would not be deductible under that section. The revenue relied strongly on the language of s. 37(1) and, contrasting the phraseology employed in s. 57(iii) with that in s. 37(1), pointed out that the legislature had deliberately used words of narrower import in granting the deduction under s. 57(iii). S. 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head "Profits or gains of business or profession". The language used in s. 37(1) was "laid out or expended—for the purpose of the business or profession" and not "laid out or expended—for the purpose of making or earning such income" as set out in s. 57(iii). The words in s. 57(iii) being narrower, contended the revenue, they cannot be given the same wide meaning as the words in s. 37(1) and hence no deduction of expenditure could be claimed under s. 57(iii) unless it was productive of income in the assessment year in question. This contention of the revenue undoubtedly found favour with the High Court but we do not think we can accept it. Our reasons for saying so are as follows. What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. S. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 , 4 (SC), where interpreting the corresponding provision in s. 12(2) of the Indian I.T. Act, 1922, which was ipsissima verba in the same terms as s. 57(iii), Bose J., speaking on behalf of the court, observed: "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned." It is indeed difficult to see how, after this observation of the court, there can be any scope for controversy in regard to the interpretation of s. 57(iii). It is also interesting to note that, according to the revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, Page | 4
Assessment Year. 2015-16 MadanlalMulchandas Jariwala the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs. 1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of Rs. 999 under the head "Income from other sources". But if there is no income, then, on the argument of the revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil, whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of s. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. It is true that the language of s. 37(1) is a little wider than that of s. 57(iii), but we do not see how that can make any difference in the true interpretation of s. 57(iii). The language of s. 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that s. 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language. This view which we are taking is clearly supported by the observations of Lord Thankerton in Hughes v. Bank of New Zealand [1938] 6 ITR 636, 644 (HL), where the learned Law Lord said: "Expenditure in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit | side to justify the deduction of an expense." We find that the same view has been taken by the Madras High Court in Appa Rao v. CIT [1962] 46 ITR 511 and Mohamed Ghouse v. CIT [1963] 49 ITR 127 (Mad), the Bombay High Court in Ormerods ( India) Private Ltd. v. CIT [1959] 36 ITR 329 , the Allahabad High Court in Chhail Behari Lal v. CIT [1960] 39 ITR 696 , the Madhya Pradesh High Court in CIT v. Dr. Fida Hussain G. Abbasi [1969] 71 ITR 314 , the Kerala High Court in M.N. Ramaswamy Iyer v. CIT [1969] 71 ITR 218 and the Orissa High Court in CIT v. Gopal Ch. Patnaik [1978] 111 ITR 86. This view is eminently correct as it is not only justified by the language. of s. 57(iii) but it also accords with the principles of commercial accounting. The contrary view taken by the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. CIT [1957] 32 ITR 377and the Calcutta High Court in Madanlal Sohanlal v. CIT [1963] 47 ITR 1 must in the circumstances he held to be incorrect.
Assessment Year. 2015-16 MadanlalMulchandas Jariwala We accordingly answer the question referred to us for our opinion in each of these two references in favour of the assessee and against the revenue. The revenue will pay the costs of both the references to the assessee.”
7 Considering the facts, and the precedent applicable to these facts, as narrated above, it is abundantly clear that expenditure incurred by the assessee for the purpose of earning the income, under the head “income from other sources” should be allowed as a deduction under section 57(iii) of the Act. The disallowance sustained by ld CIT(A) to the tune of Rs.3,44,516/-, is in fact, the expenditure incurred by the assessee for earning income under the head “income from other sources”, hence respectfully following the judgment of the Hon`ble Supreme Court in the case of Rajendra Prasad Moody (supra) ,we delete the disallowance sustained by ld CIT(A) to the tune of Rs.3,44,516/-.
In the result, appeal filed by the assessee is allowed
Order is pronounced on 21/01/2022 by placing result on notice board.