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2015 (11) TMI 57 - ITAT MUMBAI

2015 (11) TMI 57 - ITAT MUMBAI - TMI - Netting of interest income with interest expense - Disallowance of interest paid to Saraswat Co- op. Bank Ltd - Appellant prays that the claim of the assessee be allowed u/s 57 - whether CIT(A) had failed to appreciate that had assessee not made Fixed Deposit and obtained over-draft, it would lent the money directly, in which case there would have been no interest income on Fixed Deposit and no interest expense on Overdraft - Held that:- After considering t .....

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by the assessee is not wholly and exclusively laid out or expended for making or earning income as per mandate of Section 57(iii) of the Act rather it is vice versa.

The assessee has raised the plea for the first time before us that she has given the interest free loan of ₹ 98 lacs to GPL as a measure of commercial expediency because she is the Director of the said company. However the said plea has not been verified by the authorities below. We, therefore, hold that to the ext .....

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eal subject to verification by the assessing officer and accordingly set aside the matter to the file of assessing officer for necessary verification as detailed above and the assessee will be given proper and adequate opportunity in accordance with the principles of natural justice.However, the interest expenditure paid to SCBL and attributable to the advance of ₹ 92 lacs given to PMIPL shall not be allowed as expenditure to be set off against the interest income from FDR as per reasoning .....

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ioner of Income Tax (Appeals)- 18,Mumbai(Hereinafter called as the CIT(A) ) for assessment year 2009-10. The assessee has raised following grounds of appeal: 1.1 Appellant submits that CIT(A) has erred in holding that AO has rightly disallowed the interest of ₹ 16,68,880/- paid to Saraswat Co- op. Bank Ltd. Therefore , Appellant prays that the claim of the assessee be allowed u/s 57 of the I.T.Act, 1961 2.1 Without Prejudice to above, Appellant submits that CIT(A) had failed to appreciate .....

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Act, 1961. 2. The assessee has filed the appeal late by 1 day and in support of which the assessee has filed application for condonation of delay and affidavit along with medical certificate to support her contention for delay of 3 days due to medical reasons due to the illness of the assessee from the period from 29th December 2012 to 4th January 2013. The assessee counsel submitted that delay is of 1 day and not 3 day as per affidavit submitted as the appeal ought to have been filed on 4th Jan .....

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ly comprising of interest and claimed deduction of interest expenditure as under:- Income from other sources: Interest received from/on Loan … 20,57,614 Fixed Deposit… 17,99,448 Savings Account 73,275 Taxable Government Bond 7,20,000 46,50,337 Less: Interest Paid on Loan …. (-) 16,68,880 Professional Tax …. (-) 2,500 Gross Total Income 29,78,957 4. The assessing officer enquired as to how the assessee has adjusted interest paid on overdrawing from The Saraswat Coop. B .....

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to Gufic Private Ltd.(hereainafter called GPL ) of ₹ 98 lacs . The assessee submitted that the assessee has its own FDRs of ₹ 2 crores with the bank and assessee has just raised overdraft of ₹ 1.87 crores against the security of these FDRs of ₹ 2 crores on which the assessee was earning interest and instead of liquidating these FDRs the assessee has borrowed the funds against the security of these FDRs and has lent these monies to above mentioned two companies as interest .....

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is a direct nexus between the overdraft of ₹ 1.87 crores secured by the assessee from SCBL on which the interest is paid and out of which interest free funds of ₹ 1.90 crores are released to these two companies namely PMIPL and GPL and hence assessee s contention cannot be accepted . The assessing officer relied upon the decision of Hon ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries Ltd. 286 ITR 1 (P&H) and disallowed the claim of deduction of inte .....

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est bearing, then a presumption would arise that interest would be out of interest free funds generated or available with the company, provided that they are sufficient to meet such investments. That the assessee had desired to give a short term interest free loan to the 2 companies. However, as there were no funds immediately available, an overdraft was taken so that there would be no penal charges for pre-mature encashment of FD and also continue to earn high interest rate. If the FD was encas .....

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ortionate to the possible benefit that may result in the long run. The assessee requests that the intervening event of OD may be ignored by disallowing amount of interest paid on OD which is higher that interest received on FD so that there is no loss to the Revenue. In the alternative and without prejudice to the above, since the assessee's only income is that of interest, such income should be treated as income from business of money lending and treated as such. Consequently, the same may .....

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12) 50 SOT 17 (Rajkot) 6. The CIT(A) held that the assessee has received interest of ₹ 46,50,337/- on account of interest received on loans, FDR s , savings account and Government of India Saving Bonds. He also observed that the assessee has received overdraft of ₹ 1.87 crores from Saraswat Cooperative Bank Ltd (SCBL) and paid interest of ₹ 16,68,880/- on the said overdraft. The CIT(A) also held that the funds availed from the overdraft of ₹ 1.87 crores from the SCBL was .....

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Utilities & Power Ltd. (Supra ) is rebutted. He also held that the assessee s own fund are invested with other four parties from whom the interest is being received of ₹ 20,55,355/- and assessee has also invested its own funds in FDR of ₹ 2 crores with SCBL. The CIT(A) held that decision of CIT v. Abhishek Industries Limited 286 ITR 1 is squarely applicable to the case of the assessee. The CIT(A), therefore, upheld the disallowance of claim of the deduction of interest of ₹ .....

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lacs as the interest income is generated out of FDR on the security of which the overdraft facility is availed against which the interest of ₹ 16,68,880/- is paid to the same bank. The assessee submitted that If the assessee would have desired it could have liquidated the FDRs with the bank and simply released the loans to these two parties namely PMIPL and GPL and hence there would not have been any income which is chargeable to tax. The assessee submitted that similar is the situation he .....

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that any expenditure incurred to earn an income chargeable to tax u/s 56 of the Act shall be allowed as deduction u/s 57(iii) of the Act. He also submitted that the assessee has its own sufficient funds of ₹ 12.43 crores and further there are interest free borrowings of ₹ 4.30 crores as reflected in the Balance Sheet which leads to the presumption as per the decision of Hon ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (Supra) that these interest free loan .....

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TA no 176/Agra/2013(Agra Trib.). As an alternative plea , the assessee further submitted that since the assessee is a Director in one of the companies ie GPL, the interest free loan of ₹ 98 lacs granted is a business decision, the interest paid to the bank to the extent attributable to the advance to GPL should be allowed as deduction u/s 36(1)(iii) of the Act. 9. Ld. DR on the other hand, submitted that section 57(iii) of the Act can only be invoked where the expenditure (other than capit .....

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interest cannot be done as has been done by the assessee in the return of income filed with Revenue. The Ld DR contended that the assessee has diverted the interest bearing funds secured as overdraft from SCBL for non business purposes to these companies ie PMIPL and GPL free of interest. The Ld DR contended that the assessing officer has rightly made the disallowance which is confirmed by the CIT(A). He also stated that as per the decision of Hon ble Supreme Court in the case of CIT Vs. V. Gopi .....

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ssociated Capsules (supra), relied upon by the assessee is not applicable to the facts of present case as the decision is relevant and applicable only for computing the deduction u/s 80HHC of the Act and not for the purpose of section 56 and 57 of the Act. He also stated that assessee has only made bald statement which is made for the first time before Tribunal that she has given funds for the purpose of business as a measure of commercial expediency as held by the Hon ble Supreme Court in the c .....

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incurred for the purpose of earning income and not vice-versa as held by the Hon ble Supreme Court in the case of CIT v.. V. Gopinathan (supra) . Hence as per ratio of Hon ble Supreme Court decision in V Gopinathan (supra) case, the netting of interest expenditure against interest income from FDR cannot be allowed as the expenditure of interest incurred by the assessee is not wholly and exclusively laid out or expended for making or earning income as per mandate of Section 57(iii) of the Act rat .....

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s on which the assessee has earned interest income of ₹ 16.14 lacs , the assessee has availed overdraft to the tune of ₹ 1.87 crores from SCBL on the security of FDR of ₹ 2 crores on which interest of ₹ 16,68,880 has been paid to SCBL. The said amount so overdrawn from SCBL of ₹ 1.87 crores is directly utilized by the assessee to give interest free loans of ₹ 98 lacs to PMIPL and ₹ 92 lacs to GFL, thus revenue has proved direct nexus of grant of interest .....

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We, therefore, hold that to the extent of borrowing made from SCBL for lending to GPL of ₹ 98 lacs, the interest attributable thereof paid to SCBL shall be allowable to be set off against the interest income if the assessee is able to prove before the assessing officer that the said interest free loan of ₹ 98 lacs given to GPL has been given as a measure of commercial expediency as held by the Hon ble Supreme Court it the case of S.A Builders (supra) and hence to that extent we allow .....

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s. The question involved in this case is only about the allow ability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 17. In this connection we may refer to section 36(l)(iii) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') which states that "the amount of the interest paid in respect of capital borrowed for .....

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gned judgment, as well as the Tribunal and the IT authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister-concern (a subsidiary) on interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 20. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(l)(iii) because in sec .....

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it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this court in several decisions e.g. Eastern Investments Ltd. v. CIT (1951) 20 ITR 1 (SC), CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) etc. 22. In our opinion, the High Court as .....

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mport and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 24. No doubt, as held in Madhav Prasad Jatia v. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been .....

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ced to a third party should be for commercial expediency if it is sought to be allowed under section 36(l)(iii) of the Act. 25. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister-concern was by way of commercial expediency. 26. It has been repeatedly held by this court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits&quo .....

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y the assessee in its own business, but had been advanced as interest-free loan to its sisterconcern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister-concern as a measure of commercial expediency. 29. Learned counsel for the revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. v. CIT (1994) 208 ITR 989 (Bom) in which it was held that deduction under section 36(l)(iii) can only be allowed .....

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of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 30. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT (1995) 215 ITR 582 (Bom) also does not appear to be correct. 31. We agree with .....

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