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Shri Roshan Sethia Versus The ACIT, Wd. 18 (2) , Mumbai

2015 (6) TMI 207 - ITAT MUMBAI

Disallowance of interest expenditure under section 57(iii) - Held that:- In view of the facts in issue as well as the following judgment of “CIT vs. Rajendra Prasad Moody” (1978 (10) TMI 133 - SUPREME Court), the judgment of “CIT vs. Darashaw & Co. Pvt. Ltd.” (2014 (5) TMI 940 - BOMBAY HIGH COURT) and “CIT vs. M. Ethurayan” (2004 (7) TMI 39 - MADRAS High Court ), we find that the interest expenditure on the borrowed amount used for the purpose of investment in the shares is an allowable deductio .....

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rred to as the CIT (A)) erred in law and on facts in confirming the assessment of the total income of the Appellant at ₹ 5835,060/- as against ₹ 2249398/- returned by the Appellant. 2. Order dt. 27/07/12 passed by Ld. CIT(A) as well as order dt. 31/10/11 passed by Ld. ACIT are bad in law as the same are not based on facts and based on assumptions or surmises or erroneous findings and has not considered submissions made by appellant. 3. The Ld. CIT (A) erred in law and on facts in con .....

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ACIT in assessing director remuneration as income from salary instead of Income from Business or Profession as claimed by Appellant. 6. The Ld. CIT (A) erred in law and on facts in not adjudicating one of the ground of appeal being ground no.6 which contested as an alternative ground, without prejudice to above, the Ld. ACIT has erred in law and on facts in including interest income of minor childs of ₹ 4123008.49 in stead of ₹ 1601095.49 (4123008.49 -2521913.00) in appellant income .....

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re dismissed as pleaded. Accordingly, the ground Nos.1, 2, 6 & 7 of the assessee s appeal are dismissed being not pressed. 3. Ground Nos.3 to 5 are regarding the disallowance of interest expenditure under section 57(iii) of the Act. The assessee has filed its return of income declaring total income of ₹ 22,49,398/-. During the assessment proceedings the Assessing Officer (AO) has noted that the assessee disclosed interest income of ₹ 23,64,399/- under the head Income from other s .....

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nterest in M/s. Sim Diam P. Ltd. and therefore the interest is not allowable in view of the judgment of Hon ble Jurisdictional High Court in the case of CIT vs. Amritaben R. Shah 238 ITR 777. 4. The assessee challenged the action of the AO before the Ld. CIT(A) but could not succeed. The Ld. CIT(A) has held that the assessee has borrowed fund and diverted it to investment in the shares and for the purpose of share capital in a closely held company. The Ld. CIT(A) was of the view that interest on .....

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the investment in the shares of M/s. Sim Diam P. Ltd. which is a closed company of the assessee was in fact loan which was converted into the capital. The assessee has invested the amount by giving loan to the said company on which the assessee earned interest income in the earlier years. However, in the year under consideration the said loan was already converted into the share capital, therefore the interest which was earned in the earlier year could not be earned during the year under conside .....

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ubmitted that the Hon ble Supreme Court has held that what section 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 which is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Therefore, it is not the prerequisite condition under section 57(iii) that this purpose must be fulfilled in order to qualify the expe .....

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s to the extent of ₹ 3,08,56,407/- were utilized in the investment in the erstwhile partnership firm of ₹ 3,18,24,635/- to earn interest there from, remuneration and share in the profit. The business of erstwhile firm was succeeded by M/s. Sim Diam P. Ltd. w.e.f. 01.04.06. As per the balance sheet as on 31.03.07 borrowing to the extent of ₹ 6,33,64,665/- were utilized in giving loan to M/s. Sim Diam P. Ltd. to the tune of ₹ 3,58,01,120/- and investment in shares of M/s. S .....

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vs. Income-tax Officer [(2008) 22 SOT 245 (Bom.)] dated February, 2008. 2. CIT vs. M/s. Delite Enterprises (P.) Ltd. ITXA No.110 of 2009 dated February, 2009 (Bom.) 3. M/s. Avshesh Mercantile (P.) Ltd. vs. DCIT (2012) 26 Taxmann.com 43 (Mum.) 4. CIT vs. Darashaw & Co. (P.) Ltd. (2014) 49 Taxmann.com 143(Bom.) 5. M/s. Topstar Mercantile Pvt. Ltd. vs. ACIT (2011) 334 ITR 374 (Bom.) 6. ACIT vs. M/s. Delite Enterprises (P.) Ltd. (2011) 135 TTJ 663 (Mum.) 7. CIT v. M. Ethurayan (2005) 273 ITR 95 .....

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Act as the expenditure was not incurred for the purpose of earning the interest income. The assessee has also taken loan from Smt. Sohnidevi Sethia which was utilized for giving loan to M/s. Sim Diam P. Ltd. of ₹ 28,00,000/- and to Karvy Infrastructure of ₹ 90,00,000/-. The assessee received back a sum of ₹ 18,00,000/- from M/s. Sim Diam P. Ltd. and gave it to Sanghavi Savla Stock Broker thus the interest bearing amount was diverted for investment in shares. Similarly, the loan .....

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le under section 57(iii). He has relied upon the orders of the authorities below. 7. We have heard the Ld. D.R. as well as the Ld. A.R. and considered the relevant material on record. The AO has disallowed the interest expenditure under section 57(iii) on the ground that the major part of the interest bearing loan amount was used by the assessee in the investment of shares of M/s. Sim Diam P. Ltd. as well as other listed and non listed companies, therefore the interest expenditure as per the AO .....

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Rohit Manhot, Sim Jewellery Pvt. Ltd., Sohnidevi Sethia and Aman Sethia during the year under consideration. The other amounts were outstanding balances of the earlier years and shown as opening balance. There is no dispute that there was no disallowance of interest expenditure under section 57(iii) in the earlier as well as about the fact that earlier the assessee has invested in the partnership firm, the business of which was succeeded by M/s. Sim Diam P. Ltd. w.e.f. 01.04.2006. The borrowed a .....

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re to that extent there is no question of the investment made for not earning any income. So far as the remaining investment is concerned, the AO has disallowed the corresponding interest expenditure on the ground that the assessee has not earned any income on the said investment. It is pertinent to note that what is required for allowing the deduction under section 57(iii) is the purpose of the expenditure incurred by the assessee and the said purpose is for making or earning the income. Theref .....

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se 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 .....

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ich 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 .....

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enditure 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 i .....

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re 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. 9. There is a potential income in the shape of dividend on the investment made by the assessee in the sha .....

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ity of the expenditure under section 57(iii) and therefore even if the potential dividend income may be an exempted income which may attract the provisions of section 14A but in the absence of any such disallowance by the AO the issue does not arise from the orders of the authorities below for reconsideration. Therefore as far as the conditions for allowability of the expenditure under section 57(iii) if the expenditure is laid out for the purpose of earning the income then the conditions requir .....

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was capable of earning the income the condition under section 57(iii) is fulfilled. By following the judgment of Hon ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (supra) the Hon ble Jurisdictional High Court in the case of CIT vs. Darashaw & Co. Pvt. Ltd. 226 Taxman 193 held in para 11 as under: 11. In our view, after this authoritative pronouncement by the Hon'ble Supreme Court, there is no scope for any other construction and particularly as suggested by Mr. Gupta. We .....

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gument of Mr. Gupta is that the purpose of the expenditure and in the present case, has a relation with the income that is to be eventually earned from the MSRDS bonds. That the bonds were disposed of means the income by way of interest thereon would not accrue any longer. Therefore, the deduction by way of interest on borrowings and which is stated to be a liability was not a permissible deduction. That is the precise argument which has been dealt with and the Hon'ble Supreme Court has clar .....

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bited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. The Hon'ble Supreme Court held that how expenditure which is otherwise a proper expenditure can cease to be a such merely because there is no receipt of income, has not been explained by the revenue at all. It is in these circumstances the Hon'ble Supreme Court held that Section 57(iii) does not require that the purpose must be fulfilled so as to be expenditure qualified f .....

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e laid out for earning the potential income on the investment but have given much emphasis on actual earning of income and investment of M/s. Sim Diam P. Ltd. for controlling the state. A similar view is taken by the Hon ble Madras High Court in the case of CIT vs. M. Ethurajan (273 ITR 95 (Mad) in para 9 to 11 as under: 9. It is not in dispute that the respondent/assessee was a major shareholder of Binny and Co. Ltd., which was referred to by the BIFR as a sick industry, and the respondent/asse .....

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