TMI Blog2018 (4) TMI 1768X X X X Extracts X X X X X X X X Extracts X X X X ..... sister concerns. 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 Other sources. Therefore, the AO for the assessment year 2013-14 has accepted the expenditure on account of interest incurred for earning the interest income and accordingly allowed the claim of the assessee to the extent of interest income. In view of the above facts and circumstances of the case as well as the decisions as cited supra, we find that the disallowance made by the AO is not justifiable. Accordingly the same is deleted. - Decided in favour of assessee. - ITA No. 149/JP/2016 Assessment Year : 2012-13. - - - Dated:- 27-4-2018 - Shri Vijay Pal Rao, JM And Shri Vikram Singh Yadav, AM Assessee by : Shri Vinod Kumar Gupta (CA) Revenue by : Smt. Seema Meena (JCIT) ORDER Vijay Pal Rao, This appeal by the assessee is directed against the order dated 29th December, 2015 of ld. CIT (A)-III, Jaipur for the assessment year 2012-13. The assessee has raised the following grounds :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est expenditure under section 57(iii) of the I.T. Act. The assessee is an individual derived income from salary, house property, business and other sources. The assessee filed his return of income on 28th September, 2012 declaring Nil income. During the course of assessment proceedings, the AO noticed that the assessee has shown unsecured loans of ₹ 28,95,68,380/- on which the assessee has paid interest of ₹ 3,53,32,281/- and brokerage expenses of ₹ 34,60,762/-. Further, the assessee has shown loan and advances in the Balance Sheet of ₹ 22,41,52,760/- on which the assessee has received interest of ₹ 1,42,90,960/-. The said loan was given to M/s. Derewala Jewellery Industries Ltd. having its directors Shri Pramod Kumar Agarwal, Shri Debra Nishamura and Shri Yogendra Garg as well as to M/s. Garg Gems Pvt. Ltd. having its directors Shri Pramod Kumar Agarwal and Shri Yogendra Garg. The AO further noted that loans and advances were also given to other parties from whom interest on loans and advances was not received by the assessee. The AO proposed to disallow the interest expenditure claimed by the assessee against the interest income under section 57(iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Cycles Pvt. Ltd. vs. CIT, 379 ITR 347 (SC) as well as a series of other decisions. However, the ld. CIT (A) was not impressed with the contention of the assessee and held that the assessee has not filed any justification for giving loans to the sister concerns at lower rate and to the other parties without interest. 3. Before us, the ld. A/R of the assessee has submitted that it was explained before the lower authorities that variation is mainly due to the reason that, appellant raised money, sourced by finance brokers, for short periods i.e. mostly 2 months and at every maturity assessee replaced the earlier borrowing with new borrowings. That appellant has to pay interest according to the rate prevailing at that particular point of time for a duration for which money is borrowed i.e. 2 months. Whereas, the interest has been charged from associates concerns on long term basis and interest has been paid for loan which is raised on short term basis. Obviously, there would be difference in rate of interest and only due to that there is an excess of interest payment over receipt of interest. It was further explained that without using the borrowed money assessee could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013-14 while framing the assessment under section 143(3) vide order dated 30th March, 2016 has accepted the claim of the assessee and has not made any disallowance on this account. 4. On the other hand, the ld. D/R has relied upon the orders of the authorities below and submitted that the assessee has facilitated the funds to its sister concerns by taking the loans from the market and, therefore, it was not an expenditure incurred for earning the interest income as per provisions of section 57(iii) of the Act. The ld. D/R has further contended that the decision relied upon by the assessee are not applicable in the facts of the present case as in those cases the expenditure had direct nexus with the income earned under section 56 of the IT Act. 5. We have considered the rival submissions as well as the relevant material on record. The assessee has shown loss under the head Income from Other sources of ₹ 2,32,83,036/- due to the difference in the interest paid by the assessee on borrowed funds and corresponding receipt of interest income on the loans and advances given to the sister concerns/associates concerns. There is no dispute that the assessee took the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g capital in nature, which are not as such specified in Sections 30 to 36 of the Act, but laid out or expended wholly and exclusively for the purpose of business or profession, while computing the income under the head profits and gains of business or profession . The import of Sections 37(1)(iii) and 57(iii) of the Act was considered by Hon'ble the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519. It was a case where difference of opinion on the subject between various judgments of the High Courts was considered as the Tribunal had directly referred the matter for opinion of Hon'ble the Supreme Court. The issue under consideration therein was whether interest on money borrowed for investment in shares which had not yielded any dividend is permissible under Section 57(iii) of the Act. It was opined that even though the language of Section 37(1) is a little wider than that of Section 57(iii) of the Act, but that was of no effect, as the language of Section 57(iii) being clear and unambiguous has to be considered according to its plain natural meaning. It should not be given narrow and constricted meaning. It does not provide that expenditure shall be deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be 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 s. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of the opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is nonexistent , cannot be read as throwing any doubt on the principle that the true legal relation arising from a transaction alone determines the taxability of a receipt arising from the transaction. 20. 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 (supra). 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 is found that transfer of borrowed funds to a sister concern was on account of commercial expediency even if the same is interest free, the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hree authorities in the instant case are not challenged and also it is not a case of the appellant - Assessee that findings of facts as recorded by the Assessing Officer, C.I.T. and the Tribunal are perverse in nature and, therefore, we are in agreement with the submissions made by learned advocate Mr.Bhatt that this Court cannot take another view so as to interfere with the findings of fact in exercise of powers under Section 260A of the Act. 11. Before the matters are taken on hand, it is relevant to note here that in the case of Smt.Swapna Roy (supra), the Hon'ble Allahabad High Court came to the conclusion that the assessing authority has rightly tried to find out the dominant purpose with regard to investment of borrowed money in the sister concern possessing fractured financial body and rightly held that investment in the firm running in deficit since several years cannot be held exclusively for the purpose to earn income and thus, it was found as colourable device to utilize the fund of one firm in other sister concerns for the purpose of trade or business. No such factual findings are found in the impugned orders and, therefore, the decision rendered in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not as OCDs. The investment made by the appellant - Assessee in the said four companies were not loss making concern at the relevant time and, therefore, the decision of the appellant - Assessee to borrow the money at a higher rate of interest and to invest the same in the said four companies at the rate of 12% with a hope to get shares in future was made to earn income. So, it appears that the Revenue splitted the transactions in such a manner that it upheld the genuineness of borrowing, payment and receipt of interest but when question of considering payment of additional interest of 6.5% came into consideration, it termed the said part of transaction as colourable device/tax planning. So, the question is whether the Revenue can split the transaction in the manner it did so. It is true that the Court cannot re-examine/re-appreciate the findings of fact recorded by the Tribunal but as a matter of fact, after splitting transaction, as done in the case on hand, the Tribunal was required to term/treat the entire transaction as a whole colourable device. Had it been so, the matter would stand on different footing. In our opinion, the Tribunal cannot split the transaction into two pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H)and the Division Bench judgment of Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. v. CIT [2004] 268 ITR 130 and various other judgments of the Delhi and Madras High Courts (supra). 15. In the result, the question is answered in negative and in favour of the appellant - Assessee and against the Revenue. Hence, the impugned orders passed by the Tribunal are set aside to the aforesaid extent. Appeals are allowed accordingly. No order as to costs. In the case in hand the facts and purpose of taking loans and giving to the sister concerns is not in dispute and, therefore, merely because the assessee has earned less interest and paid more interest cannot be a reason for disallowing the claim of the assessee. The Hon ble Allahabad High Court in the case of CIT vs. Murli Manohar (supra) has also considered and decided an identical issue in para 4 5 as under :- 4. As regards the first question, the connection between the loans and the source of income is not challenged. The question raised is whether when the investments in respect of which the loans were raised did not yield any income can the interest paid on such lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court summed up the legal position in the following manner:- '26. 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 a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 (SC)], if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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