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TMI Blog2022 (1) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... st of commercial expediency as laid down in the case of M/s. S A Builders (288 ITR 1) by the Hon'ble Supreme Court has not been satisfied by the assessee in the present case. 4. The CIT(A) has completely overlooked that the assessee diverts interest bearing funds to its sister concerns and claims interest. But however the sister concerns conveniently chose the time and period of repayment. Interest has to be paid back by the assessee. 5. The CIT(A) has overlooked that the assessee claims interest as deduction in full and reports minimal interest income. The result being a completely stage managed and engineered to bring total income at a NIL figure. 6. The CIT(A) has overlooked that the assessee has utilized a avoidance over the years through colourable transactions payment of due taxes." 3. Brief facts of the case are that the assessee is partnership firm which is engaged in the business of finance and investments filed its return of income for assessment year 2015-16 on 29.09.2015 declaring loss of Rs. 16,64,50,745/-. The assessment has been completed u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961, on 28.12.2018 and determining total income at Rs. 6,62,63,586/- by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Act, 1961. Calculation of amount of disallowance u/s. 14A as per rule 8D of the IT Act: The working of such disallowance are worked out as under: The value of investment as on 31.03.2015 shown by the assessee is Rs. 1,76,12,27,043/-. On considering the share application money of Rs. 48,11,500/- as a part of the investment. The total value of investment came out to be Rs. 1,76,60,38,542/- (Rs. 1,76,12,27,043/- (+) Rs. 48,11,500/-) Amount of interest paid (as per assessee) Rs. 31,59,31,725 Value of investment for AY 2015-16 Rs. 1,76,60,38,543/- Value of investment for AY 2014-15 Rs. 81,68,98,756/- Total value of investment Rs. 2,58,29,37,199/- Average Value of investment from which exempt income is earned Rs. 1,29,14,68,599/- Value of assets for A.Y 2015-16 Rs. 7,54,74,06,210/- Value of assets for A.Y 2014-15 Rs. 9,00,91,52,190/- Total assets Rs. 16,55,65,58,400/- Average of Total assets Rs. 8,27,82,79,200/- 1. Expenditure not directly attributable(A*B/C) Rs. 4,92,87,526/- 2. 1/2% of average investment Rs. 64,57,342/- Total amt to be disallowed u/s. 14A (1+2) Rs. 5,57,44,868 Total amount to be disallowed u/s. 14A : Rs. 5,57,44,868/- Already disallowed u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. We further noted that the Hon'ble Jurisdictional High Court of Madras in Tax Case Appeal No. 363 of 2020 vide order dated 15.10.2020 has affirmed findings of the Tribunal in deleting additions made by the Assessing Officer towards disallowance of interest expenses u/s. 36(1)(iii) of the Act, and while doing so, it has followed its earlier decision in assessee's own case for assessment year 2013-14 in T.C.A No. 166 of 2019 dated 21.02.2019. The relevant observations of the Hon'ble High Court are as under:- "4. The above substantial questions of law have been filed against the revenue in assessee's own case in T.C.A. No. 166 of 2019 for the assessment year 2013-2014 and by Judgment dated 21.02.2019, this Court dismissed the said appeal. The operative portion of the judgment reads as follows: "3. Mr. T. Ravikumar, learned Senior Standing Counsel for the Revenue, urged before us that the Assessing Authority as well as the Commissioner of Income Tax (Appeals) had rightly disallowed the claim of interest by the Assessee under Section 36 (1) of the Act, but the Tribunal has erred in deleting the said addition, as the Assessee had also borrowed sums from its Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , copy of the partners current account placed at paper book page 10, shows that debit balances in partners current account arose more on account of losses suffered in the earlier years, than due to any drawings by the partners. It might be true that it had received interest only from four individuals to which it had advanced amounts during the relevant previous year. This does not mean that assessee had not received interest from other parties in other years. During the previous assessment year 2009-2010, it had received interest of Rs. 13,34,06,510/- from persons to whom it had advanced loans. Hence in our opinion, it is obvious that disparity between interest received and interest payment arose not on account of any selective charging of interest, but on account of cash basis system followed by the assessee. There is nothing in the statute which stopped the assessee from following the cash system of accounting. In assessee's own case for assessment year 2009-2010 on Revenue appeal (ITA No. 1690/Mds/2013, dated 27.11.2013), this Tribunal had held as under:- '6. The Commissioner of Income Tax (Appeals) held that the assessee is an investment company made investments in gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .C.A. No. 2657 of 2006 and other connected matters, decided on 17.09.2014, had held in favour of the Assessee that deduction under Section 36 (1) (iii) of the Act was allowed, though the Assessee had borrowed the capital for the purpose of business of investments. The relevant portion of the said judgment is also quoted below for ready reference: "7. We may firstly consider the first three questions as to whether the interest of borrowed capital which was utilised in the business of shares both by way of investment and stock-in-trade is allowable deduction. In so far as first three questions are concerned, in our opinion, a co-ordinate Bench of this court in CIT v. Lokhandwala Construction Inds. Ltd. (2003) 260 ITR 579 (Bom.), had addressed itself to this issue. Reliance was placed on India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC) which was under Section 10 (2) (iii) of the Income-Tax Act, 1922 which corresponds to Section 36 (1) (iii) of the present Act. This Court answered the issue in the following manner (page 581) : 'That, while adjudicating the claim for deduction under section 36 (1) (iii) of the Act, the nature of the expense-whether the expense was on capital accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be established that the amount was borrowed for the purpose of business or profession. The amount borrowed may be utilized for the purpose of acquisition of stock-in-trade or for the purpose of acquisition of capital assets. But so long as the money is utilised for business purposes the interest will have to be allowed as deduction. It is well settled that business expenditure is not confirmed to expenses incurred on revenue account. Capital expenditure may not be allowed as a deduction under section 37 because the section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36 (1) (iii) to allowance of interest paid in respect of capital borrowed which has been utilised for purchase of a capital asset. The position of law in this regard was explained by the Supreme Court in the cases of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC) and State of Madras v. G.J. Coelho (1964) 53 ITR 186 (SC)'' (emphasis supplied). " 8. We have considered the reasoning given in the decisions referred to supra and are in respectful agreement with the view expressed in the said decisions, for the reason already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business by the Assessee can be held to be arbitrary or motivated, deliberately taken to defeat the purpose of the Revenue, it cannot be held that the lower interest rate paid to the borrowers on the borrowings made by the assessee company is disallowable under Section 36 (1) (iii) of the Act. No such finding of fact has been recorded by the Tribunal. On the contrary, in Para 7 of the Tribunal's order, quoted above, the Tribunal, in our opinion, rightly held that when the cash system of accounting was adopted by the Assessee, an Investment Company, whose business is only to borrow and lend or invest, the same cannot be said to be not in the business interest or commercially expedient for the purpose of business and the concept of 'Matching Principles', which has been applied by the Assessing Authority and the CIT (A) in the present case, was not really applicable. It is not for the Revenue authorities to substitute their own wisdom or notion about the rate of interest agreed to between the parties, including the group companies and, as such, the finding of fact about commercial expediency or absence thereof is a finding of fact, out of which, no substantial question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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