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TMI Blog2018 (4) TMI 1768X X X X Extracts X X X X X X X X Extracts X X X X ..... erred by wrongly distinguishing the judgment of Apex court. 3. Under the facts and circumstances, the ld. A.O. as well as ld. CIT (A) has erred by a. Holding that excess of expenditure over income is not allowable under section 57(iii) of the Act. b. Holding that interest expenses incurred, to earn interest income is not wholly and exclusively for earning interest income. 4. Under the facts and circumstances, the ld. A.O. as well as ld. CIT (A) have erred by not allowing the interest expenditure incurred. 5. Under the facts and circumstances, the ld. A.O. as well as ld. CIT (A) have erred by not allowing brokerage expenses, incurred in relation to raise loan to give further on interest, as deduction under section 57(iii). 6. Under the facts and circumstances, the ld. A.O. has erred by not allowing interest expenses incurred in connection to construction and acquisition of house property. Further, ld. CIT (A) has erred by holding that assessee did not furnish any nexus between borrowed funds and utilization for construction of house property and consequently upholding the addition. 7. Under the facts and circumstances, the ld. A.O. has erred by determining tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, the expenditure on account of interest was incurred wholly and exclusively for earning the interest income and consequently is an allowable claim. The AO did not accept the contention of the assessee and disallowed the claim of the assessee and consequently the loss declared by the assessee under the head Income from Other sources to the tune of Rs. 2,32,83,036/- was disallowed and added to the income of the assessee. The assessee challenged the action of the AO before the ld. CIT (A) and submitted that the variation in the interest rate paid by the assessee and received from these concerns is mainly due to the reason that the assessee raised money, sourced by finance brokers for short period i.e. for 2 months and at every maturity assessee replaced the earlier borrowing with new borrowings. Thus the assessee paid interest as per the prevailing interest rate on the short term borrowing. Whereas the interest has been charged from the associates concerns on long term basis which has caused the difference in the rate of interest and the loss under the head Income from other sources. The assessee also contended that the genuineness of the transaction of borrowing the mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of interest to be paid or charged is a sole commercial decision and cannot be challenged solely on the basis that there is loss. In this regard, the ld. A/R placed reliance on the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Dalmia Cement Pvt. Ltd., 254 ITR 377 (Delhi.). He has also placed reliance on recent judgment of Hon'ble Gujarat High Court in the case of Atir Textile Industries Pvt. Ltd. vs. DCIT, 230 Taxman 104, wherein it has been held that deduction u/s 57(iii) is allowable even if the rate at which interest is paid is more compared to rate at which interest is earned. 3.1. The ld. A/R has pointed out that the complete bank accounts, details as required were filed during the assessment proceedings. The ld. A.O. as well as ld. CIT (A) in their order has come to conclusion that there was unsecured loans of Rs. 28,95,68,380.25 and the loans and advances on which interest were charged was Rs. 22,41,52,759.53, meaning thereby, to the extent of loans & advances given as stated out of borrowed fund has been laid out and utilized for such loans & advances. He has reiterated his reliance on the decision of Hon'ble Gujarat High Court in case of M/s. Atir Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the said interest was less than the expenditure incurred by the assessee. The Hon'ble Gujarat High Court in the case of M/s. Atir Textile Industries Pvt. Ltd. vs. DCIT (supra) while dealing with an identical issue in para 8 to 15 has held as under :- "8. We have heard submissions in extenso made at bar and minutely examined the principles laid-down in the case-laws cited at bar as well as scope of Section 57(iii) of the Act. 9. To begin with, it is useful to reproduce first three observations recorded by the Hon'ble Apex Court in the case of Vodafone International Holdings B.V. (supra) which read as under:- (i) It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not adopt a dissecting approach. (ii) All tax planning is not illegal or illegitimate or impermissible. (iii) There is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal. 9.1 While answering the question "Whether having regard to relationship between different concerns, where a transaction which is patently imprudent, takes place, the taxing authority should examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plain natural construction of the language of s. 57 (iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC), where interpreting the corresponding provision in s. 12(2) of the Indian I.T. Act, 1922, which was ipsissima verba in the same terms as s. 57(iii), Bose J., speaking on behalf of the court observed: "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned." It is indeed difficult to see how, after this observation of the Court there can be any scope for controversy in regard to the interpretation of s. 57(iii). It is also interesting to note that, according to the Revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs. 1,000, if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense." 19. The issue regarding jurisdiction of the taxing authorities was considered by Hon'ble the Supreme Court in CIT v. B. M. Kharwar, [1969] 72 ITR 603 (SC), wherein it was opined that a taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. The relevant paragraph is extracted below: "The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction". This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence- oral and documentary- a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts profit. The IT authorities must put themselves 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. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transaction and for that purpose, it may lift the veil but while doing so, the competent authority has to consider the transaction as a whole and for that reason, the competent authority cannot split the transaction in more than one part and select any particular part so as to say that such part is illegal or illegitimate or impermissible and deny to extend benefits under Section 57(iii) of the Act. 13. It is an admitted fact that the Revenue has not disbelieved the loan transaction of Rs. 3 crores with the company, namely, Arvind Mills Ltd. at the rate of 18.5% p.a. and payment of interest at the rate of 12% to the said four companies where, the appellant - Assessee made investment. It is not in dispute that the appellant - Assessee invested the amount equally in the above four companies so as to get interest at the rate of 12% p.a. It is not a case of the Revenue that the estimated book value of the shares of the said company, as reproduced hereinabove, is not true or correct. Thus, the transaction of borrowing of Rs. 3 crores and payment of interest at the rate of 18.5% made by the appellant - Assessee to Arvind Mills Ltd. and, in turn, receipt of 12% interest by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Porrits and Spencer (Asia) Ltd. v. CIT [2010] 329 ITR 222 (P&H): 231 CTR 294, the Punjab and Haryana High Court had somewhat similar situation to tackle with. Referring to and relying on the decision of the apex court in the case of Union of India v. Azadi Bachhao Andolan (2003)263 ITR 706 (SC) and the decision of this court in the case of Banyan and Berry v. CIT (1996)222 ITR 831 (Guj), it was observed that once the transaction is genuine merely because it has been entered into with a motive to avoid tax, it would not become colourable device, earning any disqualification. It was observed as under (pg.234 of 329 ITR) 'The aforesaid discussion would show that once the transaction is genuine merely because it has been entered into with a motive to avoid tax, it would not become a colourable device and consequently earn any disqualification. The Hon'ble Supreme Court in the concluding paras of its judgment in Union of India v. Azadi Bachao Andolan (2003)263 ITR 706 (SC) has rejected the submission that an act, which is otherwise valid in law, cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. . . ." (p. 522) 5. Therefore, the first question has to be answered in the affirmative in favour of the assessee." Thus what is required for allowing the expenditure under section 57(iii) of the Act is the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. In the case in hand there is a direct connection and nexus between the expenditure incurred on account of interest paid and the interest income earned by the assessee on the loans and advances given to the sister concerns. 6. Even otherwise, the interest expenditure is an allowable claim under section 37 of the Act on the ground of commercial expediency as held by the Hon'ble Supreme Court in case of S.A. Builders vs. CIT, 288 ITR 1 (SC) as well as the decision in case of Hero Cycles Pvt. Ltd. (supra) wherein the Hon'ble Supreme Court has reiterated the view as under :- "12. Insofar as loans to the sister concern/subsidiary company are concerned, law in this behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves 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. 14. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses." 7. We further note that the AO in the scrutiny assessment passed under section 143(3) for the assessment year 2013-14 vide order dated 30th March, 2016 has allowed the claim of the assessee though it was restricted to the income under the head O ..... 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