TMI Blog2015 (10) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... red to tax by the Assessee as 'income from other sources'. Since the interest paid to HSBC on the loan availed was in the nature of an expenditure wholly and exclusively laid out for the purpose of earning the interest income, it ought to be permitted to be netted against such 'income from other sources' in terms of Section 57 (iii). There is also merit in the contention of the Assessee that for AY 2003-04, the CIT (A) and the ITAT mechanically followed the earlier order for the AY 2002-03 although the business of the Assessee had commenced in June 2002. Since this was no longer a pre-operative phase, the interest paid to HSBC would in any event have been allowable as business expenditure under Section 36 of the Act for AY 2003-04.For the aforementioned reasons, the question framed is answered in the affirmative i.e. in favour of the Assessee and against the Revenue. The addition made by the AO is directed to be deleted and the netting of the interest paid on the borrowed sum against the interest income earned is allowed. - Decided in favour of assessee. - ITA 334/2014 & CM 10693/2014, ITA 336/2014 & CM 10696/2014 - - - Dated:- 21-9-2015 - S. Muralidhar And Vibhu Bakhru, JJ. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an of ₹ 25 crore was disbursed to it by the Assessee @ 11.75% interest p.a. 4. The Assessee filed its return for AY 2002-03 on 30th October 2002 declaring a loss of ₹ 35,69,97,065, which it subsequently revised at a profit of ₹ 1,00,690. In the revised return filed on 2nd December 2003 the Assessee showed income from other sources after adjusting interest expenses of ₹ 77.86 lakhs. 5. For AY 2003-04 the Assessee filed its return on 2nd December 2003 declaring a loss of ₹ 2,62,87,59,740. The Assessing Officer (AO) by an order 29th March 2006 noted that for AY 2003-04 the Assessee had received interest in the sum of ₹ 81,00,165 on the loan advanced and had sought to set it off against the interest expenses. Referring to the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 6 SCC 117, the AO held that setting off the interest income of the pre-operative period against the interest expense was not allowed. It was held that interest expense will form part of the pre-operative expenses pending capitalization and the interest income will be taxed separately as income from other sources. The interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced and interest earned thereon. The ITAT too observed that the Assessee was not engaged in the business of money lending. The interest income earned by the Assessee was to be considered under the head 'income from other business'. The Assessee's contention that the interest expenditure incurred should be netted off against the interest income was held to be not sustainable. 9. This Court, while admitting these appeals on 8th July 2014, framed the following question of law: Did the Tribunal fall into error of law in holding that the expenditure on interest claimed by the Assessee could not be allowed in terms of Section 57 (iii) of the Income Tax Act, 1961? 10. This Court has heard the submissions of Mr. Kavin Gulati, learned Senior counsel for the Assessee and Mr. Kamal Sawhney, learned Senior Standing Counsel for the Revenue. 11. Before discussing the facts of the case, it may be noticed that the provision in the Income Act, 1922 ('1922 Act'), corresponding to Section 57 (iii) of the Act, was Section 12. In Eastern Investments Limited v. Commissioner of Income-Tax (1951) 20 ITR 1 the Appellant was an investment company originally formed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action which resulted in ultimate gain to the Appellant, but whether it was properly entered into as a part of the Appellant's legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business. 13. Analysing the clauses of the agreement in question in that case, the Supreme Court in Eastern Investments Limited (supra) held as under: The matter is clearly writ in the bond . Moreover, we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an application to reduce the capital of the company. The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out however mistaken the directors and shareholders of the company may have been. 14. Ultimately, the Supreme Court while allowing the appeal observed that there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12 (2) of the Income Tax Act. 15. Subsequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er company (which was a subsidiary of the Assessee) as a measure of commercial expediency, and if it was, it should have been allowed. In para 36 of the said case, the Court observed as under: We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B) Ltd. (2002) 254 ITR 377 (Del) 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 of the Assessee itself), the Revenue cannot justifiably claim to put itself in the armchair 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 maximise 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 viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. In other words, if it is such expenditure as a prudent businessman would incur for the purpose of business. (iii) Once it is established that there was nexus between the expenditure and the purpose of the business, not necessarily the business of the Assessee itself, the Revenue cannot put itself in the armchair of the businessman and decide how much of the expenditure is reasonable having regard to the circumstances of the case. (iv) Where in the pre-operative phase the surplus funds borrowed for the purpose of business are kept by an Assessee in fixed deposits, the interest earned thereon would be 'income from other sources'. The interest paid on the loan borrowed would not be permitted to be netted against such interest income in the pre-operative phase. 21. The Court notes that the Revenue was under a basic misconception that the Assessee was using a part of its 'surplus' borrowed funds to advance a loan to SCL, its holding company. As already noticed, the Assessee had not advanced a sum of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
