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Income Tax Officer Ward-4 (5) Pune Versus M/s. Brahma Associates

Allowability of the interest income from the interest expenditure on the basis of nexus between the interest expenditure and the interest income - Held that:- We find the Ld.CIT(A) on the basis of the various details filed by the assessee allowed the claim of the assessee on the ground that the AO has not examined the entire details furnished by the assessee and has been guided by the heading of the expenses such as Advertisement/Miscellaneous Expenses and concluded that interest expenditure inc .....

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en from Rupee Cooperative Bank Ltd and the amount of advance to Brahma Finance Corporation and Brahma Associates. The Ld. Departmental Representative could not controvert the above factual finding given by the CIT(A). Further, the finding of the Ld.CIT(A) that the miscellaneous expenditure in the ledger account contains the entire details of expenditure which includes the interest expenditure and also the receipt of interest and dividend for F.Y. 2001-02 wherein the journal entries 447 and 448 a .....

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SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For the Appellant: Shri Kishor Phadke For the Respondent: Shri Rajesh Damor, CIT ORDER PER R.K. PANDA, AM : This appeal filed by the Revenue is directed against the order dated 18-09-2013 of the CIT(A) Central, Pune relating to Assessment Year 2003-04. 2. Facts of the case, in brief, are that the assessee, an APO, filed its return of income for A.Y. 2003-04 on 01-12-2013 declaring tot .....

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er appeal the Tribunal following the decision of Hon ble Bombay High Court in assessee s own case directed the AO to allow deduction u/s.80IB (10) of the I.T. Act in respect of profit on 15 residential buildings on the basis of profits earned from these exclusively residential buildings on stand-alone basis. 4. So far as treatment of interest income as income from other sources is concerned the Tribunal observed that there is no immediate and direct relation between the housing projec .....

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. . . .considering the above submissions we find that there is no dispute that interest receipt must have an intricate relation with the interest expenditure, then only the balance can be considered for tax purpose. One has to examine that the expenditure incurred has a connection or there must exist nexus between receipts and payments. We fully agree with the contention of the assessee that the quantum of interest income for tax purpose has to be determined in accordance with the computation p .....

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and 3 are thus allowed for statistical purposes. 5. The AO thereafter on the basis of the direction given by the Tribunal asked the assessee to make its submissions. The assessee vide letter dated 21-05-2012 submitted that it had obtained loan of ₹ 5,00,00,000/- from Rupee Co-operative Bank Ltd. This loan was in turn advanced to M/s. Brahma Finance Corporation. The assessee submitted a chart showing the details of amounts due to bank and amounts due from M/s. Brahma Finance Cor .....

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ee cooperative bank to avail the overdraft facility and therefore it had purchased 5,00,000 equity shares, from which it had earned a dividend of ₹ 8,000/-. It was accordingly contended that there is a proximate relation between the business and the dividend income. 6. However, the AO was not satisfied with the explanation given by the assessee. On the basis of the various details furnished by the assessee he noted that the assessee could substantiate the nexus of interest earne .....

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o:p> 5. The assessee in its submission dated 21/05/2012, has provided the ledger account of M/s. Brahma Finance Corporation for the financial year relevant to A.Y. 2002-03. As per the ledger account, the interest accrued to the assessee from M/s. Brahma Finance Corporation is ₹ 38,19,238/- during the financial year. Further, from the examination of the bank statement and ledger accounts of M/s. Brahma Finance Corporation it is found that the assessee has partly used the borrowed loan .....

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ature of interest but also includes certain miscellaneous expenses which have been written off as no longer payable. Therefore, a nexus of interest earned and interest paid can be established to the extent of loans same interest bearing loan given to M/s. Brahma Finance Corporation & interest earned thereof. For the financial year under consideration, such nexus can be found only to the extent of ₹ 38,19,238/-. The balance expenditure on account of interest is treated as expenditure in .....

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diture. This categorization of the assessee is not acceptable because the actual nature of said expense is found to be certain miscellaneous expenses. 6. Based on the above discussion an amount of ₹ 71,75,503/- is treated as income from other sources because no direct nexus between the borrowed funds, loans given, interest expenditure incurred and interest earned could be established. Further, the dividend amount of ₹ 8,000/- is also taxed under the head income from other .....

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and in grounds of appeal No 1 & 2 has contested the disallowance of the claim of the appellant AOP of set off of interest received of ₹ 71,83,503/- against interest paid without considering that the appellant received interest only against interest paid on loan taken. During the appellate proceedings, the appellant has submitted that the AOP a joint venture decided to jointly develop property at S.No 1A/1/2 situated at village Kondhwa Khurd, Tal: Haveli, Pune. The six parties of the AO .....

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in appellant's own case directing the Assessing Officer to examine that the expenditure incurred had connection or there must exist nexus between the receipts and payments as the same remained to be examined by the Assessing Officer, the matter was set aside to the Assessing Officer to decide the issue after affording opportunity to the assessee to establish nexus between receipt and payments. The appellant during the assessment proceedings submitted that there was a direct nexus between the .....

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be in turn advanced to M/s Bramha Finance Corporation. The appellant further states that during the F.Yrs. 2000-01 and 2001-02 the occupancy certificate from the PMC was not obtained due to the construction being incomplete, the expenditure on account of administrative, selling and other expenses were transferred to Misc. expenditure and reflected as 'current assets' in the balance-sheet. The appellant also filed the journal vouchers for the two financial years reflecting the transfer o .....

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Finance Corporation upto 31-3-2002. The appellant has contended that the aforesaid entries appearing in the balance sheet as at 31-3-2001 and 31-03-2002 indicates direct nexus between loan obtained from the aforesaid bank and the advances given to Bramha Finance Corporation. The appellant further stated that for the year ending 31-3-2003 i.e. AY. 2003-04, the appellant paid interest of ₹ 48,29,769/- to the bank whereas earned interest of ₹ 38,19,238/- from Bramha Finance Corporation .....

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s on selling, administration, marketing etc. The details of interest expenditure thus claimed and the interest income received till 31-03-2003 are as follows : INTEREST PAID : a) Upto 32-03-2002 ₹ 61,71,506/- b) For F.Y. 2002-03 ₹ 48,29,769/- - Rs.1,10,01,275/- INTEREST RECEIVED : a. From Brahma Finance Corporation (upto F.Y. 31-03-2002) ₹ 59,20,843/- b. From Brahma Finance Corporation ( F.Y .....

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ure till 31-03- 2002. The appellant has thus contended that the Assessing Officer ought to have considered and given set off for the interest earned from Brahma Finance Corporation upto 31-3-2002 of ₹ 59,20,843/- and also of M/s. Brahma Builders received during F.Y. 2002-03 of ₹ 12,54,660/-. The appellant has thus contended that as there is a direct nexus between the loan taken from Rupee Co-operative Bank Ltd and amounts advanced to Brahma Finance Corporation/Brahma Builders, the se .....

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Assessing Officer so far as the receipt of interest is concerned. The Assessing Officer, however, has admitted to the fact of the amounts borrowed from Rupee Co-op Bank Ltd to have been advanced to M/s Bramha Finance Corporation and hence the nexus between the two has not been disputed. However, the Assessing Officer has considered out of the total receipt of interest of ₹ 1,09,94,741/-, a sum of ₹ 38,19,238/- only and the remaining amount of ₹ 71,75,503/- has not been consider .....

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e appellant it becomes clear that the amount of interest received from Bramha Finance Corporation up to F.Y. 31-03 2002 amounting to ₹ 59,20,843/- and that of Bramha Builders of ₹ 12,54,660/- for F.Y. 2002-03 ought to have been considered for giving the set off as there is a direct nexus between the loan taken from Rupee Co-operative Bank Ltd and amount advanced to Bramha Finance Corporation and Bramha Associates. The appellant has given the heading as Misc expenditure to the ledger .....

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ssessing Officer to be set off against the interest paid of ₹ 1,10,01,275/-. 3.6 In view of the above fact the disallowance made by the Assessing Officer of ₹ 71,75,503/- is liable to be deleted and the grounds of appeal No.1 & 2 raised by the appellant are liable to be allowed. 8. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us with the following grounds : 1. The learned Commissioner of Income-tax (Appeals) erred in ho .....

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Bank is not an expenditure incurred for earning interest income from Bramha Finance Corp. and Brahma Builders to be eligible as expenditure u/s. 57(iii) of the Income-tax Act, 1961. 3. The learned Commissioner of Income-tax (Appeals) erred in holding that the amount of interest received from Brahma Finance Corporation amounting to ₹ 59,20,843/- and that of Brahma Builders of ₹ 12,54,660/- ought to have been considered for giving the set off when there is no direct nexus b .....

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nd any or all the grounds of appeal. 9. The Ld. Departmental Representative strongly opposed the order of the CIT(A). Referring to the bank statement filed by the assessee in the paper book he submitted that there are certain cash withdrawals through self-cheque, therefore, entire loan has not been diverted to Brahma Finance Corporation as claimed. Referring to page 201 of the paper book the Ld. Departmental Representative submitted that the assessee has received interest @12% from B .....

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various persons as per list 4 which includes Brahma Finance Corporation and M/s. Brahma Builders. The Ld.CIT(A) has not adjudicated the issue properly. Further, the assessee follows mercantile system of accounting. It is not understood as to why interest of earlier years has been debited during the year. Further, dividend income has not been explained till today. Since the bank account contains common pool of funds and no separate books of accounts are maintained, therefore, the assessee may be .....

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een reversed on 29-03-2003 relating to A.Y. 2003-04. He submitted that as against payment of interest of ₹ 1.10 lakhs the assessee has received interest of ₹ 1.09 lakhs. Referring to the copy of the assessment order the Ld. Counsel for the assessee drew the attention of the Bench to the finding given by the AO where he has accepted the amount of ₹ 38,19,238/- being interest received from Brahma Finance Corporation. Therefore, there is no justification how the AO can deny for th .....

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of the CIT(A) being in accordance with law should be upheld and the grounds raised by the Revenue should be dismissed. 11. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. The only dispute that has to be decided in the impugned appeal is regarding allowability of the interest income of ₹ 71,75,503/- from the interest expenditure on the basis of nexus between the interest ex .....

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e from other sources and did not allow set off from the interest expenditure since according to the AO the assessee could not establish any direct nexus between the borrowed funds, loans given, interest expenditure incurred and interest earned. We find the Ld.CIT(A) on the basis of the various details filed by the assessee allowed the claim of the assessee on the ground that the AO has not examined the entire details furnished by the assessee and has been guided by the heading of the expenses su .....

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