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2016 (2) TMI 113 - ITAT AHMEDABAD

2016 (2) TMI 113 - ITAT AHMEDABAD - TMI - Disallowance of interest expenditure - nexus between the impugned interest income vis-à-vis the interest expenditure - Held that:- CIT(A) has treated the assessee’s fixed deposit income of ₹ 22.5 lacs under the head other sources to be exempt. His claim of corresponding interest expenditure made u/s 57(III) qua any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making .....

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out charging interest. The same is nowhere applicable qua the facts of the instant case wherein no nexus between the impugned income and interest is forthcoming. Thus, we accept Revenue’s arguments. The Assessing Officer’s findings disallowing the impugned interest expenditure are accordingly restored. - Decided in favour of revenue - ITA No. 831/Ahd/2012 - Dated:- 21-10-2015 - Shri Anil Chaturvedi, Accountant Member and Shri S. S. Godara, Judicial Member For The Revenue: Shri Dinesh, Sr. D.R. F .....

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ile indicates that this is second round of litigation between the parties on the very issue before the tribunal. Case called twice. None appears at assessee s behest. The Revenue places on record the hearing notice dated 26th August, 2015 containing assessee s signature having received the same on 11-09- 2015. We accordingly proceed ex-parte against the assessee. 3. The assessee individual filed his return on 31-07-2001 stating income of ₹ 13,28,020/- from salary and other sources. The Ass .....

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l proceedings. He was inter alia of the view that the assessee s interest claim of ₹ 10,38,237/- in question i.e. ₹ 5,15,245/- paid to the bank on current a/c. No. 91890 and ₹ 5,22,986/- pertaining to Shri Shyam K. Agrawal @ 10.5% on unsecured loans of ₹ 90 lacs did not have any nexus with the above stated interest income declared under the head other sources u/s. 57 of the Act. He accordingly disallowed the same in consequential order passed on 24-12-2009. 5. The assesse .....

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ot even in the statue. 5. GROUND No. 1 :- The contention raised in Ground No. 1 is that the LAO grossly erred in disallowing interest expenses of ₹ 10,38,23i/- even though the same is fully allowable u/s.57(iii) of the Act. 5.1 OBSERVATION OF THE AO :- During the course of assessment proceedings the AO observed that the assessee is having his own capital of ₹ 4,08,20,480/-. Out of the said capital, the major investment of ₹ 2 Crores has been invested in FDR of OBC, Surat and &# .....

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whom huge amount was given as interest-free loan. As per section 36(i)(iii) of the Act, the assessee has not fulfilled the conditions that " the money borrowed must have been used for the purpose of business". Therefore, it is crystal clear that the deduction in respect of interest expenses can be given only if the amount borrowed is utilized for the business or profession. In the instant case, the assessee is nowhere engaged in the business or profession and no income is shown under t .....

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following along with the extract of the balance sheet as on 31.03.2001 as under :- From the above balance sheet, your honour would appreciate that the total interest free funds available with me is ₹ 4,80,61,281/ in the form of capital and interest free unsecured loans, which, which is far in excess of the interest free advances of ₹ 1,49,99,350/- as alleged in the reasons for reopening reproduced in Para.4.3 herein above. Hence, out rightly, it is submitted that in the vent of inte .....

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f the said company since all my other funds were blacked and not liquid. Thus, out of business compulsion, the interest funds were borrowed by me. Your goodself may further note that the amount invested in the name of Alpha Industrial Park is not a loan or advance but it is a business investment in factory land & building at Daman as co-owner and hence, it cannot be termed as interest free advance. Covered matter :- (a) It is also submitted that the issue that no interest is disallowable whe .....

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rposes ; if it exceeds, proportionate disallowance can be made ". (b) The said view has even been consistently followed by the jurisdictional Ahmedabad Bench of the Tribunal even in subsequent judgment i.e. in the case of Navpad Textile Industries Ltd.(ITA No. 2311/Ahd/95 dtd. 30.01.2002) wherein also no disallowance of interest has been made to the extent the assessee had interest-free funds available with it. (ii) Expenditure hyas been incurred for earning income :- Your goodself may note .....

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ot earned any income in the year under consideration, the interest paid cannot be allowed as expenses. In this regard, I would like to bring to the kind notice of your honour the direct decision of the Hon.ble Supreme Court in the case of CIT v/s. Rajendra Prasad Moody (1978) 115ITR 519 CSC), wherein, it has been held that section 57(iii) does not require that income must have been earned as a result of the expenditure. Hence, it is most humbly submitted that the erstwhile AO's reasoning for .....

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vestment, I did not want premature encashment of the said fixed deposit since the bank interest rates were falling and such withdrawal would have resulted into severe fall into my earnings and therefore, out of commercial expediency and prudence, I instead of prematurely encashing the said P.P. availed loan against the security of the same whereby I preserved higher income earning assets and incurred liability of a much lower extent. The business prudence and commercial expenditure gets clearly .....

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question of disallowance of any interest would not have arisen. However, by my prudent and commercial approach in fact returned me taxable income of ₹ 12,11,769/- Thus, even otherwise, interest expense is allowable on the ground that it is incurred with the objective of preserving the income earning asset. Judicial pronouncements :- Reliance is placed on the following judicial pronouncements directly applicable to the facts of the case. (a) The Hon.'ble Hyderabad Bench of the Tribunal .....

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curred by way of interest on loan raised to discharge the estate duty liability is allowable deduction u/s. 5(iii) as there is nexus between the expenditure incurred and the earning of the income. The CIT was not right in directing the ITO to disallow the interest paid to the bank ". (b)The Hon.'ble Hyderabad Bench of the Tribunal once again in a recent judgement in the case of Ashok Brothers v. ITO (2002) 76 TTJ 427 (Hyd) has held as follows:- " No part of interest paid by the ass .....

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case. Rebuttals of the findings of the erstwhile AO :- The observations/findings of the erstwhile AT as contained in his order as regards the facts of the case and the legal position are rebutted herein after. (i) The erstwhile AO has held that the decisions referred to by the assessee are on business expenditure as provided in section 36(i)(iii) whereas, in the assessee's case there is no business activity but income from other sources and hence his case is governed by the provisions of sec .....

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gh Court in the case of Venkateshwara Real Estate & Enterprises (P) Ltd. v. CIT (1985) 151ITR 729 (Ker)has held that any expenditure incurred for maintaining the source of income is deductible u/s. 57(iii). The Hon'ble Court has further held that the connection between income and expenditure need not be direct but may even be indirect. (b)The Hon'ble Bombay High Court in the case of CIT v. N. H. Maharani Shri Vijaykuberba Saheb of Morvi & Ors. (1975) 100 ITR 67(Bom) has held that .....

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computation of income. It may kindly be noted that it is not absolutely necessary that for treating a person as carrying on business, he should do the business by himself and not through other or an energy like partnership/company. (iii) The erstwhile AO has also held that the amount borrowed has been utilized in the investment of assets exempt from tax and in nonassessable income. The said finding of the erstwhile AO is also incorrect since I have made the investment in partnership firm and in .....

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v. CIT( 1964) 51 ITR 835 (Mad) and H.T. Conville v. CIT (1936) 4 ITR 137 (Lahore), which is absolutely misplaced since both these decisions are in respect of section 36(i)(iii) and not section 57(111). Hence, this stand of the erstwhile AO is in fact self defeating since he himself held that my case is covered by section 57(iii) and not by section 36(i)(iii). DECISION:- I have considered the observation of the AO in the assessment order as well as the contention raised by the AR of the appellant .....

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y and set of interest expenses during the period of set up of industry and commencement of business, whereas, the arguments advanced by the AR of the appellant is fully justifiable as the appellant has hit own capital worth ₹ 4,08,20,481/-and the interest-free loans worth ₹ 72,40,800/-. Therefore, the appellant has in aggregate interest-free fund available with him stands to 4,80,61,281/-. As against the said interest-free funds, the AO has advanced ₹ 1,49,99,350/- to various p .....

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