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TMI Blog2017 (8) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under the head 'Income from other sources' amounting to Rs. 53,65,251. 2. On the facts and in the circumstances of the and in law, the Commissioner of Income-tax (Appeals) has erred in deleting the additions made by the Assessing Officer on account of financial expenses amounting to Rs. 2,94,754 out of the total expenses claimed amounting to Rs. 25,33,850 under the head 'financial expenses'. 3. The appellant prays that the order of the Commissioner of Income-tax (Appeals) on the above grounds be set aside and that of the Assessing officer be restored. 4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 4. The short facts of the case are as under : The assessee filed a return of income for the assessment year 2005-06 on May 30, 2005. The return was processed under section 143(3) read with section 147 of the Income-tax Act. The assessee in the computation of income has claimed the interest amount of Rs. 53,65,251 as interest paid to HDFC Ltd. and claimed the deduction under section 57 of the Act. The learned authorised presentative submitted that this loan of Rs. 7 crores was taken from HDFC Ltd. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the Act which can be allowed, if any other expenditure not being capital in nature laid out or expediently fully and exclusively for the purpose of making or earning such income. The loan was taken from HDFC Ltd. is not used for housing and the same was used for purchase of debentures. Therefore, the assessee has contended that the assessee has got the huge money of interest out of which 10 per cent. is applied in debentures and the assessee had indirect ownership of the property, therefore the Assessing Officer was of a view that the assessee is not entitled for deduction under section 57(iii) of the Income-tax Act, 1961. The Assessing Officer also discussed that the assessee has taken loan from HDFC Ltd. as a housing loan and there was no commercial justification for purchasing the debenture. Therefore, the Assessing Officer also examined the detail about the company TV Zine India.com Pvt. Ltd. and Makrupa Chemicals Pvt. Ltd. The shareholding of the companies which are as under : Name of the company Shareholders TV Zine India.com Pvt. Ltd. Nishit Desai 5010 shares of Rs. 10 each Swati Nishit Desai 5000 shares of Rs. 10 each Vikram Shroff 1 share of Rs. 10 each Devang D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased the debenture of both these companies by borrowing funds from the bank. The debentures are unsecured and carry interest at a negligible rate of 0.05 per cent. Though the debentures have been issued by the two companies actually the entire funds have found their way into the company Makrupa Chemicals Pvt. Ltd. Funds transferred by the assessee ostensibly through the debenture to TV Zine India.com Pvt. Ltd. were entirely transferred to Makrupa Chemicals Pvt. Ltd. for acquiring the entire share capital. The shares were acquired by TV Zine India.com Pvt. Ltd. at a premium of Rs. 3,400 per share. The premium amount does not appear in the balance-sheet of the Makrupa Chemicals Pvt. Ltd. Therefore, there is no justification for the assessee to advance a huge sum of Rs. 7.2 crores against the debentures that are unsecure and carry a negligible interest rate by utilising the borrowed money at substantial interest. Therefore the whole transaction is colourable device for claiming the tax deduction which the assessee should have not availed of. Therefore Assessing Officer has relied upon the decision of the hon'ble Allahabad High Court in the case of CIT v. Smt. Swapna Roy [2011] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 57(iii) being narrower, contended the Revenue, they cannot be given the same wide meaning as the words in section 37(1) and hence no deduction of expenditure could be claimed under section 57(iii) unless it was productive of income in the assessment year in question. The contention of the Revenue undoubtedly found favour with the High Court but we do not think we can accept it. Our reasons for saying so are as follows. 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 that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 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 section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the lang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such merely because there 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 section 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. It is true that the language of section 37(1) is a little wider than that of section 57(iii), but we do not see how that can make any difference in the true interpretation of section 57(iii). The language of section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that section 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language. This view which we are taking is clearly supported by the observations of Lord Thankerton in Hughes (Inspector of Taxes) v. Bank of New Zealand [1938] 6 ITR 636 (HL), where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 57(iii) of the Act. 9.12 In another case of CIT v. New Savan Sugar and Gur Refining Co. Ltd. [1990] 185 ITR 564 (Cal) the question was as to 'whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the expenditure of Rs. 27,000 paid to M/s. K. C. Thapar and Bros. (P) Ltd, as a deductible expense under section 37(1) of the Income-tax Act, 1961, relating to the assessment year 1972-73?' In this case, while citing the decision of the Supreme Court in the case of Rajendra Prasad Moody (supra), the hon'ble Calcutta High Court came to the following conclusion (page 571 of 185 ITR): 'The finding of the Tribunal is that the expenditure was reason able on the facts of this case and that it was wholly and exclusively laid out for the purpose of business. Although there may be disagreement as to whether the expenditure was for the purpose of business as no contention was raised before the Tribunal that the assessee only derived lease rent which could not be termed as business activity, there cannot be any dispute that it was wholly and exclusively laid out or expended for the purpose of making or earning the income. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redecessor has not formed an independent view and has only reiterated the findings of the Assessing Officer including the aspect of 'lifting of veil'. Such an issue of 'lifting of veil' is not involved at all in the present case. The simple facts are that the appellant had taken loan of Rs. 7 crores from HDFC Ltd. (in the form of a housing loan) and had invested the whole amount in purchasing the debentures of the two companies namely Makrupa and TV Zine. Since Makrupa was the owner of the concerned residential property i.e. flat No. 51, NCPA Apartments, Apsara Co-operative Housing Society, the appellant thus indirectly became entitled to the ownership of the said residential property (it may be noted that the debentures purchased by the appellant were convertible into shares of the companies at the option of the appellant). Hence it cannot be said that there was any colourable device. The utilisation of loan given by the HDFC Ltd was also very much in the knowledge of the bank (i.e. HDFC) because the relevant documents for securing the said loan including the original title documents held by Makrupa in respect of flat No. 51, NCPA Apartments, Apsara Co-operative Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore stores may come up. Thus, there is a significant upside to investing in debentures purely in terms of income generation and also to secure the investment. 9.18 The appellant's contention that the predominant intention of investment in debentures was to obtain controlling interest in the company sooner or later as the debentures are convertible, has to be appreciated. Though the rate of interest payable to HDFC is 10.5 per cent. there is a possibility that the appellant may earn up to 18 per cent. per annum, if the company makes profit ; including from sale of flat or otherwise. 9.19 In this regard, it must be understood that any assessee is entitled to conduct its business as per its own prudency. The transactions undertaken by the appellant cannot be considered either to be sham or a colourable device in any manner, as there is no undue tax gain derived by the appellant. Had the appellant directly purchased the said flat No. 51, NCPA Apartments, Apsara Co-operative Housing Society, the appellant would have been entitled to deduction of entire interest under section 24 of the Act. So both way the appellant could not have been denied deduction of interest. In this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.' 9.21 Other decisions cited by the appellant also support his case for deduction of interest of Rs. 53,65,251 under section 57(iii) of the Act. The appellant has also argued that in the preceding years, the claim of interest made by the appellant under section 57(iii) of the Act was consistently allowed in assessment proceedings under section 143(3) and hence the principle of consistency has been violated in identical circumstances. In this regard, the appellant has cited the decision of the Bombay High Court in the case of CIT v. Naishadh V. Vachharajani (supra). This argument of the appellant also cannot be ignored. Hence, the Assessing Officer is directed to grant deduction of Rs. 53,65,251 under section 57(iii) of the Act. Since I have decided the claim of the appellant under section 57(iii) of the Act in his favour, I am not discussing the alternate claim of the appellant regarding deduction under section 24 of the Act." 5. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upa Chemicals Pvt. Ltd. The assessee and his wife have borrowed the money from HDFC for the purpose of purchasing the property by acquiring the company Makrupa Chemicals Pvt. Ltd. The assessee's contention is that the assessee has borrowed the money to invest in PCCUD of these two companies to make belief arrangement. This apparent is not real. The real purpose for borrowing the money from HDFC is not to invest in PCCUD for the purpose of earning income from PCCUD but to invest in the house property through acquiring the company Makrupa Chemicals Pvt. Ltd. Therefore the Assessing Officer is justified in not allowing the claim of the assessee. 7. The learned senior counsel argued that it is a simple proposition that the assessee has borrowed funds from HDFC Ltd. to the tune of Rs. 7 crores and invested the said funds in purchase of debentures of two companies. The assessee has paid the interest of Rs. 79,92,929 in the assessment year 2009-10 and in the assessment year 2005-06 the assessee has paid the interest of Rs. 53,65,251 to HDFC Ltd. and claimed the deduction under section 57 of the Act. The assessee claimed the deduction of the said amount only under section 57 and not u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per section 57 of the Act certain deductions are to be made in computing the income chargeable under the head "Income from other sources" and one such deduction is that set out in clause (iii) which says that any expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. The earning of income or sufficiency or adequacy of the same is not a pre-requisite for claiming the deduction under section 57. It does not say that expenditure shall be deductible only if income is earned. The copy of the bank statement indicates that the assessee has borrowed Rs. 7 crores from HDFC for the purpose of purchasing the debentures. The nexus between borrowing and utilisation of the borrowing is established beyond a shadow of doubt. The assessee has submitted a copy of certificate from HDFC for interest paid, the copy of the application for loan submitted to HDFC, copy of debenture certificate of M/s. TV Zine India.com Pvt. Ltd. and the copy of bank statement indicating the entry of loan taken of Rs. 7 crores from HDFC deposited and indicating entry for its utilisation for purchase of debentures of M/s. Makrupa Chemicals Pvt. Ltd. and M/s. TV Zine In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) for the assessment year 2005-06 in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC), Sassoon J. David and Co. (P) Ltd. v. CIT [1979] 118 ITR 261 (SC), Jayshree Tea and Industries Ltd. v. CIT [2005] 272 ITR 193 (Cal), CIT v. Express Newspapers Ltd. [1964] 53 ITR 250 (SC), Ormerods (India) (P) Ltd. v. CIT [1959] 36 ITR 329 (Bom), Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC) and CIT v. Gopala Naicker Bangaru [2012] 344 ITR 297 (Mad). 8. We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case it is submitted fact on record that the assessee has taken the loan from HDFC Ltd. and interest paid to the bank and which was claimed under section 57(iii) of the Act and under the head "Income from other sources" on the ground that the borrowings from HDFC Ltd. have been directly utilised for acquisition of debenture of Makrupa Chemicals Pvt. Ltd. and TV Zine India.com Pvt. Ltd. The Assessing Officer was of a view that the interest paid to HDFC Ltd. is not allowable under section 24 and section 57 of the Act. The learned Commissioner of Income-tax (Appeals) has considered the submission of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of the business or profession' and not laid out or expended-for the purpose of making or earning such income' as set out in section 57(iii). The words in section 57(iii) being narrower, contended the revenue, they cannot be given the same wide meaning as the words in section 37(1) and hence no deduction of expenditure could be claimed under section 57(iii) unless it was productive of income in the assessment year in question. This contention of the Revenue undoubtedly found favour with the High Court but we do not think we can accept it. Our reasons for saying so are as follows." 9. From the above judgment the hon'ble Supreme Court has held that the expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. Therefore, we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in allowing the claim of the assessee. We also find support of the decision in the case of CIT v. New Savan Sagar and Gar Refining Co. Ltd. [1990] 185 ITR 564 (Cal) wherein they have relied upon the decision of the hon'ble Supreme Court. Therefore, we are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the hon'ble Supreme Court in the case of Radhasoami Satsang (supra), we are of the view that the Assessing Officer has allowed the claim while completing the assessment under section 143(3) for the assessment years 2003-04, 2004-05, 2006-07 and 2007-08 and 2008-09. Therefore, respectfully following the decision of the jurisdictional High Court in the case of CIT v. Naishadh V. Cachharajani (supra), we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in allowing the claim. Therefore, we dismiss the Departmental appeal for the assessment year 2005-06 and we allow the claim for the assessment year 2009-10. In the result, ground No. 1 of the Revenue is dismissed. Ground No. 2 10. This ground relates to the financial expenses of Rs. 2,94,754. The Assessing Officer has disallowed Rs. 2,94,754 on the ground that the assessee has given interest-free advance of Rs. 51,35,817 to the related concern. The assessee has debited Rs. 25,33,850 under the head "financial expenses" out of which Rs. 2,94,754 pertains to the interest paid for working capital loan obtained against the mortgage of property. As against this, the assessee has given lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has established that the borrowings have been utilised for the purpose of which it was borrowed, no part of interest on this borrowing should be disallowed even if the assessee has advanced any interest-free advances. It is also a fact on record that the assessee had interest-free fund to the tune of Rs. 6,77,75,208 and out of interest-free funds the assessee has given the loans on which the interest has not been charged is of Rs. 51,35,817. Therefore, no disallowance can be made. Moreover, we find that the assessee has utilised this borrowings for the purpose of business. Therefore as per the decision of the hon'ble jurisdictional High Court in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom) which supports the case of the assessee, we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in his action and our interference is not required at all. 12. In the result, the Departmental appeal is dismissed. 13. Now we will deal with the assessee's appeal bearing I. T. A. No. 2439/Mum/2013 for the assessment year 2009-10. I. T. A. No. 2439/Mum/2013 (assessment year 2009-10) Ground No. 1 14. This ground is already adjudicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, we find that Shefali Garodia was relieved from the assessee's office from August 16, 2008. The car was purchased on September 1, 2008 and in the same month of September 2008 it was transferred to Shefali Garodia's name. The terms of employment does not provide for giving any car to her. We find that the gift of car is purely gratitude. This expenditure was not incurred wholly and exclusively for the purpose of business. We also find during the course of hearing that whether the assessee has given cars to all his employees. The learned authorised representative fairly admitted that we have not given car to every employee. Therefore, we are of the view that it is a personal gift rather than a part of employment or contribution made to his business. We are of the view that every businessman is free to make the expenditure but it must be allowable subject to that it was wholly and exclusively for the purpose of business. Therefore, we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in his action and our interference is not required. 20. In the result, this ground of the assessee is dismissed. Ground No. 3 21. This g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hatrapati Shivaji Maharaj Vasthu Sangrahalaya towards co-publication of the book named Indian Life and Landscape By Western Artists. The assessee has been provided 100 copies of the said book which the assessee has presented to the foreign and Indian clients who are coming to India for professional work such as business law and international taxation. Therefore, we have verified the copy of the relevant pages of the book. We are of the view that this expenditure is a business expenditure, therefore we allow the same. 25. We find that the assessee has paid Rs. 12,50,000 to International Fiscal Association (IFA) which comprises of tax professionals from world over and NDA has initiated IFA-Nishith Desai Center for thought leadership in international taxation to look into the emerging issues in international taxation and find new generation solutions for cross border tax issues in a fair and equitable manner. Therefore, we are of the view that this is a genuine expenditure for professional development. Therefore, we allow the same. Hence, this ground is allowed. Ground Nos. 4 to 10 26. Ground Nos. 4, 5, 6, 7, 8, 9 and 10 are related to disallowance of electricity expenses, general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture is in excess under section 40A(2)(b), therefore, he disallowed the same. Matter carried to the learned Commissioner of Income-tax (Appeals) and the learned Commissioner of Income-tax (Appeals) has held as under : "7.11. I have gone through the issue. Mr. Suril Desai has completed his B. Sc. in Management from Menlo California. The appellant has paid Rs. 40,000 p.m. for the services rendered by Mr. Suril Desai to the appellant. The Assessing Officer could not establish that Mr. Suril Desai has not done any services to the appellant's business. The Assessing Officer also could not establish that Mr. Suril Desai is pursuing full time law course. The appellant has submitted that Mr. Suril Desai is pursuing part time B. L. course and has attended to the works of the appellant in the remaining time. Further, from the statement recorded from advocate Bijal Ajinkya by the Assessing Officer it is seen that the starting salary for the fresh graduates in law is Rs. 60,000 p.m. Further, it is seen that this expenditure incurred was accepted by the Department in the earlier assessment year. Considering all these facts, I hold that the payment made to Mr.Suril Desai has to be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,00,000 paid to Chatrapati Shivaji Maharaj Vastu Sangrahalaya. In this case, the amount is paid towards publishing of a book which is not at all connected with the appellant's business. In view of this, the expenditure of Rs. 5 lakhs is not considered as expenditure met out for business purposes and hence, should be disallowed. (iii) the payment of (USD 25,000) Rs. 12,35,250 made to America India Foundation. It appears to be a donation to a foundation and the appellant could not properly explain how this payment is connected with the business carried on by the appellant. In view of this, I hold that Rs. 12,35,250 cannot be allowed as deduction." 33. We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, we find that the assessee has given the break-up of the total expenses amount of Rs. 96,70,308 pertains to sponsorship expenses and 20 per cent. amount for gift. The assessee has produced the evidence that out of the total expenses of Rs. 96,70,308 expenditure towards the conference and sponsorship of seminars and all the expenditure pertain to hotel, food and travelling expenses. Therefore, this expenditure was verified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne by Nishith Desai Associates. The Nishith Desai Associates does not pay any compensation to Prantik Strategic Advisors Pvt. Ltd. for using the said office premises, therefore they have paid the electricity bill. We are of the view that the learned Commissioner of Income-tax (Appeals) is justified in allowing the same. 37. The next ground relates to the disallowance of the financial expenses of Rs. 22,53,000 out of the financial expenses. The Assessing Officer noted that the assessee has debited Rs. 22,53,000 under the head "financial expenses". The Assessing Officer was of a view that the said expenditure is incurred on the interest which is interest expenses and the assessee has given the interest-free advances. Therefore, the Assessing Officer has disallowed the claim. The matter carried to the learned Commissioner of Income-tax (Appeals) and the learned Commissioner of Income-tax (Appeals) has allowed the claim by observing as under : "14.7 The appellant has submitted the details of loans given, on which interest has been charged as under : Particulars Amount Date on which Nilesh Baxi 5,00,000 21-7-2007 Mukund Negandhi 10,000 Prior to 31-3-2001 Vikey Over ..... X X X X Extracts X X X X X X X X Extracts X X X X
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