TMI Blog2020 (9) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... om other sources, assessee is entitled to deduction u/s 57 (iii) of the act of any expenditure which is not in the nature of capital expenditure, if it is laid out and expended wholly and exclusively for the purpose of making or earning such income. Undisputedly there is no claim by the revenue that above expenditure is in the nature of capital expenditure. The interest income earned by the assessee is from loans and advances given to sister concern which is shown by the assessee to have been financed by obtaining loan on interest from other parties. Therefore, such interest paid on unsecured loan is laid out and expended wholly and exclusively for the purpose of making an earning such interest income. Relevant judicial pronouncements placed before us by both the parties also canvass a view that any expenditure incurred by the assessee which is not in the nature of capital expenditure, if laid out and expended wholly and exclusively for the purpose of making or earning any income which is chargeable to tax under head income from other sources is allowable as deduction to the assessee u/s 57 (iii) of the act. Allow appeal of the assessee and direct the lower authorities to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. On looking at the computation of total income, the learned assessing officer noted that assessee has earned dividend income on units of mutual fund of ₹ 120,644/ and dividend income on equity shares of ₹ 386,904,285/ . Both these income or claimed as exempt income. The assessee has shown the income from interest of ₹ 37,69,51,117/- which is disclosed under the head income from other sources. Assessee has also earned advisory income of ₹ 9 lakhs that is disclosed as profits and gains of business and profession. AO noted that in the balance sheet the assessee has reflected all the above income under the head other income‟ and has not declared anything under the head revenue from operations‟. Therefore the AO reached at the conclusion that assessee has not commenced any business. 4. Therefore the learned assessing officer asked the assessee about the disallowance u/s 14 A of the act read with provisions of Section 36 (1) (iii) of the act. Assessee submitted its reply on 20 August 2018 stating that no expenses are attributed to dividend income earned by the assessee, as it did not incur any expenses. However, assessee submitted that it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the learned assessing officer adopted two different approaches for making a disallowance u/s 14 A of the act. This he has termed as various alternatives. In alternative I, he worked out the disallowance holding that finance cost is also covered for disallowance u/s 14 A of the act. Therefore, in that alternative, he worked out the proportionate finance cost of ₹ 376,982,874/ , took proportionate of average investment of ₹ 5,993,469,528/ , computed average total of ₹ 9,495,543,885/ . Thus, adopting a ratio of total average investment / average total asset and divided total finance cost of ₹ 376,982,874 and worked out a sum of ₹ 257,270,727 as disallowance u/s 14 A of interest expenditure. The sum he added the direct expenditure of ₹ 1,947,974/ and further 0.5% of average investment amounting to ₹ 107,38,540/ . Thus computed disallowance u/s 14 A of ₹ 269,957,241/ . Based on the above calculation out of the total finance cost of ₹ 376,982,874/ , as he has already disallowed finance cost u/s 14 A of ₹ 257,270,727/ , he granted the deduction of the balance interest expenditure of ₹ 119,712,147/ against the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 334 crores. AO was also of the view that identical disallowance is also required to be made while computing the book profit under provisions of Section 115 JB of the act. 10. Accordingly, the learned assessing officer passed an order u/s 143 (3) of the act on 24th of December 2018 at ₹ 254,977,238/ . Subsequently there was a mistake apparent from the record in computation in para number seven of the assessment order, which was rectified by the learned assessing officer as per order u/s 154 read with Section 143 (3) of the act on 5th February 2019. However, there was no change in the assessed income. 11. Aggrieved with the order of the learned assessing officer assessee preferred an appeal before the learned Commissioner of income tax. He passed an order on 27th of November 2019. Before the learned CIT A, assessee objected to the disallowance u/s 14 A of the act in the normal computation of total income on both the alternatives as well as the addition to the book profit u/s 115 JB of the act. Assessee also contested assessment order on some technical issues. The CIT A rejected the objection of the assessee on technical issues. The learned CIT A deleted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by it has business expenditure and therefore disallowing the sum as per the provisions of Section 36 (1) (iii) of the act holding that the same was not incurred for the purpose of its business. The appellant has further challenged the reasoning given by the AO for the purpose of restricting the allowance of interest expenditure u/s 57 of the act to ₹ 119,712,147/ . On perusal of the submission of the appellant, it is noticed that the submission of the appellant is twofold, wherein it has first challenged the disallowance of a portion of interest cost of ₹ 257,270,727 u/s 36 (1) (iii) of the act on the ground that no such deduction of expenditure was claimed by it and accordingly there is no question of disallowance and in second part of the submission the appellant is challenging the allowance of interest expenditure u/s 57 of the act restricted by the AO at ₹ 119,712,147/ on the ground that the entire borrowed funds were attributed towards the earning of interest income and accordingly the borrowing cost is allowable as expenditure incurred for earning of interest income u/s 57 of the act. In support of its contention, the appellant has also referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact is that interest cost to the extent of ₹ 257,270,727/ claimed by the appellant u/s 57 of the act is untenable in law and cannot be allowed as deduction since, the interest cost to the extent of ₹ 257,270,727/ has no nexus with the interest income earned by the appellant in the year Under consideration in view of the detailed analysis of source of funds and utilisation of funds made by the AO in the assessment order. Accordingly, the disallowance of interest expenditure to the extent of ₹ 257,270,727/ is confirmed. 12. Therefore, assessee aggrieved with that order and finding of confirming the disallowance of interest expenditure to the extent of ₹ 257,270,727/ is in appeal before us. 13. The learned authorised representative submitted that there is a basic flaw in the computation of the disallowance vis a vis the amount of interest free funds available with the assessee. It is submitted that out of the long-term borrowing of ₹ 512 crores, ₹ 147.37 crores is in the form of unsecured interest-free loans taken from the directors, shareholders of the appellant company. Therefore, the comparison of the borrowing of ₹ 512 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 December 2017 passed by the learned assessing officer was challenged before the learned CIT (A) which travelled up to the level of the coordinate bench and full relief was granted to the assessee. He extensively referred to the order of the coordinate bench dated 12 March 2019 in case of the assessee reported in (2019) 71 ITR (T) 113 (Delhi ITAT) stating that the interest income and interest expenditure Under the head of income from other sources stands accepted in earlier years and has attained finality. He also supported the same relying on the decision of the honourable Supreme Court in case of Radhasoami Satsang versus CIT (1992) 193 ITR 321 (SC). He also submitted that assessee has adequate own funds which are non-interest-bearing in the form of share capital and free reserve of ₹ 436.16 crores as available from the balance sheet, invoking the disallowance u/s 36 (1) (iii) is unwarranted in view of the decision of the honourable Supreme Court in case of Commissioner of income tax (large taxpayers unit) versus Reliance Industries Ltd (2019) 410 ITR 466 (SC). He also submitted a chart showing the case of the assessee compared with the case of the issue before the hono ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear the unsecured loan which does not have any interest cost of ₹ 166 crores is reduced to ₹ 1 47 crores at the end of the year. Further there is in an increase of 20 crores in interest bearing advances. Therefore, it cannot be doubted that assessee has utilised the borrowings during the year in reutilizing above funds. It is further apparent that ₹ 190 crores is outstanding in last year borrowed from India Bulls and housing finance Ltd which is locked in advances of ₹ 120 crores in IIC Ltd and ₹ 70 crores in Rattan and India Power Ltd. On both these unsecured loan and unsecured advances the rate of interest paid and received is @ 13%. Further during the year assessee has borrowed ₹ 175 crores, out of which ₹ 75 crores is borrowed from STCI Ltd at 11% interest rate and further ₹ 100 crores from Citibank at the rate of 10%. Out of this, assessee has granted loan of ₹ 104 crores to IIC Ltd at the rate of 13%, ₹ 49.70 crores were advanced to Rattan India Power Ltd at the rate of 13% and to Ms Saroj Jain ₹ 75 lakhs at the rate of 12%. Therefore net utilisation of new loan of ₹ 175 crores is used in interest-bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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