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TMI Blog2022 (7) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... , in brief, are that the assessee is the Director in M/s Vivilash Colour Labs Private Limited and filed her return of income for the A.Y. 2014-15 on 22/01/2015 declaring total Income of RS.33880/- (Salary Rs.96,000/-+ Income from House Property at Rs.9,79,874/- + Income from Other Sources at Rs.4,38,162/-) after claiming interest on loan from Chola-IDBI invested as Capital in firms of Rs 15,85,752/- and Chapter VIA deduction of Rs.62,120/-. The assessment was completed u/s 143(3) vide order dated 19/12/2016 by accepting the income returned 3.1 On verification of record and the assessment order dated 19/12/2016, it was noticed by the AO that in the computation of total income, partners salary and interest from Vivilash Digital Imaging Centre and Vivilash Colour labs is shown at Nil. However, interest on loan from Chola-IDBI invested as capital in firms of RS.15,85,752/- was claimed arriving at business income of Rs.(-) 15,85,752/-. The net profit of Rs 2,558/- from Vivilash Digital Imaging Centre and Rs.1,36,416/- from Vivilash Color Labs was claimed as exempt. As the loan amount from Chola-IDBI is utilized in earning exempt income and no income from business was derived during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources of the partnership capital were the loans taken from Chola Mandalam Finance and IDBI and these loans were directly invested as the capital of the firm. The appellant relied on the judgment of SA Builders Vs. CIT as reported in 288 ITR 1 and the judgment of Punjab Stainless Steel Industries V. CIT 324 ITR 396 and stated that the capital must have been borrowed by the appellant for the purpose of business for the allowance of the interest on that capital and therefore the disallowance should be deleted The appellant further relied on the fact that the said interest was allowed as a deduction in the earlier year and relied on certain judgments on consistency in this regard. It is very clear that the appellant has invested the funds so borrowed as the share capital of the firms. From the statement of income, the appellant is not receiving any interest on the capital so deployed, nor receiving any remuneration as a working partner in the firm. From these facts it is clear that from the said firms, there was no occasion of generating business income as no remuneration and no interest was to be received in the capacity of the partner of these firms. Therefore, the only profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed accordingly. The ground no. 4 is dismissed as the same has been already adjudicated and is a prima facie fact based on records. The ground no. 1 and 5 being general in nature needs no adjudication. 'To sum up appeal is dismissed." 5. Aggrieved with such order of the ld.CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:- 1. On the facts and in the circumstances of the case, the order passed by the ld. commissioner of Income Tax (Appeals)-5, Hyderabad, is erroneous and unsustainable. 2. The CIT(A) erred in sustaining the action of the AO in disallowing interest expenditure of Rs.15,85,752, which issue is highly debatable, in a proceeding under section 154 of the Act. 3. The finding of the CIT(A) that the issue is not debatable is legally incorrect in as much as investment in capital account not only earns prof1t (which is exempt from tax) but also interest income to be paid to partner, which is taxable. The CIT(A)failed to appreciate that the partnership deed provided for payment of interest to partners and the same was not paid for want of sufficient income. For these and other grounds that may be urged, it is prayed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords of narrower import in granting the deduction under section 57(iii). Section 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head 'Profits or gains of business or profession'. The language used in section 37(1) was "laid out or expended-for the purpose of the business or profession" and not "laid out or expended-for the purpose of making or earning such income" as set out in section 57(iii). The words in section 57(iii) being narrower, contended the Revenue, they cannot be given the same wide meaning as the words in section 37(1) and hence no deduction of expenditure could be claimed under section 57(iii) unless it was productive of income in the assessment year in question. This contention of the Revenue undoubtedly found favour with two High Courts but we do not think we can accept it. Our reasons for saying so are as follows. 4.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. It is the purpose of the expenditure that, is relevant in de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he various decisions including decision of Hon'ble Supreme court in the case of Rajendra Prasad Mody (supra) & Eastern Investment Ltd.(supra) and various other decisions, there need not be income to claim expenditure u/s. 57 of the I.T.Act. Same is the case even for business income. Therefore, it is his submission that the issue being a debatable one, the provisions of section 154 cannot be applied to the facts of the present case and therefore, the order of the ld.CIT(A) upholding the 154 rectification proceedings by the AO is not in accordance with the law. 13. I find sufficient force in the above arguments by the ld.Counsel for the assessee. The assessee in the instant case is a partner in the firm M/s. Vivilash Digital Colour Labs Pvt.Ltd and has invested in the firm by borrowing from financial institutions i.e Chola-IDBI on which she has paid interest of Rs. 15,85,752/-. There is also a provision in the partnership deed to pay interest on capital to the partners. Since, there was no sufficient profit, interest was not provided by the firm on the capital. The assessee claimed interest income as expenditure and set-off the same against other income. This was also accepted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The same has been admitted as total exempt towards share capital. With regard to the Chola- interest on loan, the same was clarified that the Loan Agreement No. XOHEHYD000000844189 has been sanctioned on 31/10/2012 as a "Home Equity Loan". The Share Capital introduced in the Firms: M/s Vivalash Digitai Imaging Centre @ 25% and Mis Vivilash Digital Color labs @ 45% have been admitted as per the schedule IF of Income tax return filed. Further as per the Sch BF expenses of Rs.12,65,808/- pertaining to M/s. Vivilash Digital Imaging center (AADFV0911 V) admitted as loss has been disallowed. 16.1 As the loan amount from Chola IDBI was utilized in earning exempt income and no income from business has been derived during the year under consideration, the expenses in relation to the partners of the firm as shown in the schedule BP of Rs. 12,65,808/- claimed from the firm VIVILASH DIGITAL IMAGING CENTER (AAOFV0911V) cannot be allowed as there is no nexus between the income admitted and the expenditure. Therefore Rs. 12,65,808/- claimed as exempt income under "Income from Business" was disallowed by the AO. 17. In appeal, the ld.CIT(A) upheld the action of the AO by observing as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on certain judgments on consistency in this regard. It is very clear that the appellant has invested the funds so borrowed as the share capital of the firms. From the statement of income, the appellant is not receiving any interest on the capital so deployed, nor receiving any remuneration as a working partner in the firm. From these facts it is clear that from the said firms, there was no occasion of generating business income as no remuneration and no interest was to be received in the capacity of the partner of these firms. Therefore, the only profit which could have been achieved from this deployment was the share of profit of the partnership firms, which is exempt u/s 10. Thus, the said investment could only result in an exempt income and no income could be generated under the head Profit and Gains from Business and Profession or Income from Other Sources. Thus all the other heads of income have been snatched away in the manner in which the investment has been made. Thus the interest expenditure has been incurred for the purpose of earning an exempt income and therefore cannot be allowed as a business expenditure u/s. 36(1)(iii) of the Income Tax Act as no business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowing interest expenditure of Rs.12,65,808 3. The CIT(A) failed to appreciate that investment in capital account not only earns profit(which is exempt from tax) but also interest income to be paid to partner, which is taxable and therefore the AO could not have disallowed interest expenditure claimed by the Appellant. The CIT(A) failed to notice that the partnership deed provided for payment of interest to partners and the same was not paid for want of sufficient income. 19. I have heard the rival arguments made by both the sides and perused the orders. Although identical issue had been decided by me in assessee's own case for AY 2014-15 in the preceding paragraphs, however, the same is not applicable for the present year, since there is no rectification done by the AO and disallowances has made in the order passed u/s. 143(3). The ld.CIT(A) in the instant case, while deciding the issue has given justifiable reasons as to why the interest expenditure cannot be set-off. The Ld. Counsel for the assessee could not bring any material before me so as to take a contrary view than the view taken by the ld.CIT(A) on this issue. Accordingly, the grounds raised by the assessee are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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