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2019 (10) TMI 393

..... uch income". In order that expenditure may be admissible under section 57(iii), it is necessary that the primary motive of incurring it is directly to earn income falling under the head "income from other sources". The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. 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. The section 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 The expression 'commercial expediency' is an expression of wide import 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 business expenditure if it was incurred on grounds of commercial expediency. In the .....

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..... , the assessee preferred an appeal before the ld. CIT(A) and ld. CIT(A) considering the case of both the parties dismissed the appeal of the assessee. 4. Aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us on the ground mentioned hereinabove. 5. Regarding Ground No. 1, this ground raised by the assessee relates to challenging the order of ld. CIT(A) in confirming the additions of ₹ 7,79,478/- on account of disallowance of interest expenses u/s 57(iii) of the Act. 6. The ld. AR appearing on behalf of the assessee reiterated the same arguments as raised by him. The ld. AR also relied up on the written submissions submitted by him before ld. CIT(A) as well as before us. 7. The written submissions submitted by the assessee before the ld. CIT(A) are in Para 2.2 of its order and the same is reproduced below. 2.2 The relevant extract of the submission of the appellant is an under:- "The assessee has taken unsecured loans from various parties during the year under consideration or in the earlier years for the purpose of advancing loans to other parties and making investment in finesse jewels Pvt. Ltd. where the assessee is director and share .....

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..... assing the order u/s 143(3) has not considered the details of interest paid and interest received provided by the assessee and concluded that the assessee has advanced loans to various parties at low rate or nil rate of interest as the interest expenditure is higher than the interest income. Therefore the contention of the assessing officer is not maintainable as it is not based on correct facts. Therefore such an addition which is based on assumptions or surmises or erroneous findings needs to be deleted. Further the assessing officer has stated in its order that no prudent man intentionally incur a loss by obtaining loans at higher rate of interest and advancing loans on either low or nil rate of interest. In this regard it is to be submitted that the assessee has not acted neligigently or carelessly while borrowing money from parties. It has even not advanced money to the parties at lower rate of interest except of M/s Finesse jewels Pvt. Ltd. which is a related concern of the assessee and such advances have been made out of commercial expediency by the assessee. In such a case the assessee has not utilized the loan amount for its personal use but the purpose of taking loan was .....

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..... r and shareholder in such company and derives salary and commission income from such company. It has made investment in the company for the purpose of earning the income from the investment either in the form of interest or in the form of dividend or capital gain. Therefore such an advance was clearly given by the assessee for the purpose of commercial expediency. Further it is to be noted that any advance made to the related/sister concern out of commercial expediency is allowable under the income tax return and any expenses claimed in respect of such advance given can be claimed as deduction u/s 57(iii) 137 of the income tax act, 1961. There are various case laws in support of the assessee s contention. Some of them are as follows:- The issue as to whether an assessee, who had borrowed funds carrying interest and advanced part thereof to its sister concern on interest free basis, can claim deduction to that extent was considered by Hon'ble the Supreme Court in SA Builders Limited's case. In the aforesaid case, Hon'ble the Supreme Court opined that the tax authorities must not look at the matter from their own view point but that of a prudent businessman. In case, it i .....

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..... to facilitate the making or earning of the income; (6) If, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred diZilieeMayne earned, the expenditure must be treated as an allowable deduction; (7) It would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on the activity which is the source of the income; and nexus must necessarily be nexus must necessarily be between the expenditure incurred and the income earned; (8) It is not necessary to show that the expenditure was a profitable one or that in fact income was earned; (9) The test is not whether the assessee benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bonafide for making or earning the income; (10) The question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being on of law. Further it is to be submitted that Clause (iii) .....

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..... interest is not allowable in view of the judgment of Hon'ble Jurisdictional High Court in the case of "CIT vs. Amritaben R. Shah" 238 ITR 777. It is to be noted that the assessee has borrowed fund and invested the same by either giving loan or investment in the shares of the group concern as well as shares of the other listed companies from which it could earn interest income, dividend income and capital gain on sale of such shares. The investment in the shares of M/s. SimDiam P. Ltd which is a closed company of the assessee was in fact loan which was converted into the capital. The assessee has invested the amount by giving loan to the said company on which the assessee earned interest income in the earlier years. However, in the year under consideration the said loan was already converted into the share capital, therefore the interest which was earned in the earlier year could not be earned during the year under consideration. The Ld. A.R. has contended that earning income from the expenditure incurred is not a ShriRoshanSethia condition for allowing the deduction under section 57(iii) of the Act. It is only for the purpose of making or earning of income which is re .....

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..... mercial expediency. In actual such loans and advances which are provided at low or nil rate of interest out of commercial expediency does not affect the nature of transaction and the interest expense would still be eligible to be claimed by the assessee u/s 57(iii) if such expenditure is wholly and exclusively laid out for earning the income under 'income from other sources". In the present case also since the advance to M/s finesse jewels Pvt. Ltd. are made at nil rate of interest out of commercial expediency, it won't affect the nature of interest expenditure to be personal and is eligible to be claimedas deduction u/s 57(iii) as it is laid out wholly and exclusively for earning interest income by the assessee." 8. On the other hand, the ld. DR relied upon the orders passed by the Revenue authorities. 9. We have heard the rival contentions and pursued the material available on record, judgments cited by the parties as well as orders passed by the Revenue authorities. As per the facts of the present case, the assessee has taken unsecured loans from various parties during the year under consideration or in the earlier years for the purpose of advancing loans to ot .....

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..... Jewels Pvt. Ltd. which is related concern of the assessee and such advances have been made out of commercial expediency by the assessee. It is admitted fact that nowhere, AO had pointed out that the assessee had utilized the loan amount for its personal use. As per the decisions of Hon ble Delhi High Court in the case of CIT vs. Dalmia Cement (Bharat) Ltd (2002) 254 ITR 337 (Del), CIT vs. Rockman Cycle Industries Pvt. Ltd. reported in 331 ITR 401 and CIT vs. Special Prints Ltd. reported in 356 ITR 404 wherein it has been held as under:- the learned assessing officer 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 reasonable expenditure is having regard to the circumstances of the case. Rather he must put himself 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 view point but that of a prudent businessman. 11. The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditur .....

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..... a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income. 15. Further, clause (iii) to section 57 makes admissible the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income (income chargeable under the head "income from other sources'). This means section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively 'for the purpose of making or earning such income". In order that expenditure may be admissible under section 57(iii), it is necessary that the primary motive of incurring it is directly to earn income falling under the head "income from other sources". The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or e .....

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..... that earning income from the expenditure incurred is not a ShriRoshanSethia condition for allowing the deduction under section 57(iii) of the Act. It is only for the purpose of making or earning of income which is required for allowing the deduction under section 57(iii) and not the actual income earned by the assessee. He relied upon the decision of "CIT vs. Rajendra Prasad Moody". 19. After hearing the plea of both the parties the honorable ITAT, Mumbai has given the decision in favour of the assessee by relying on the decision of the judgment of Hon'ble Jurisdictional High Court in the case of "CIT vs. Darashaw& Co. Pvt. Ltd." and judgment of Hon'ble Madras High Court in the case of "CIT vs. M Ethurayan". 20. A similar view is taken by the Hon'ble Madras High Court in the case of "CIT vs. M Ethurajan" (273 ITR 95 (Mad). 21. In the present case also the assessee had provided to the assessing officer with the bank statements in which it is clearly visible that the funds raised from the unsecured loan taken from various parties is utilized for lending money to various parties. It means that the interest paid on unsecured loans .....

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