TMI Blog2010 (12) TMI 1350X X X X Extracts X X X X X X X X Extracts X X X X ..... rom deposits with various parties amounting to Rs.6,98,043/- charging interest at the rate of 6% to 15%, whereas interest paid at the rate of 10% to 12% on unsecured loans. It was further noticed that the assessee claimed payment of bank interest to the tune of Rs.2,13,290/-. In the assessment order, the Assessing Officer also observed that expenditure under the head income from other sources is allowable only when any expenditure made to incurred taxable income and the assessee has made various deposits on lower rate of interest and paid interest on unsecured loans at higher rate. In this way, the assessee had diverted its interest bearing funds to non-interest bearing advances. The Assessing Officer asked the assessee to show-cause why excess of interest paid i.e. Rs.46,876/- should not be disallowed. In this regard, nothing was furnished to justify the claim before the Assessing Officer. Thereafter, the Assessing Officer observed that the assessee is in receipt of exempted income of Rs.41,380/- from dividend under section 10(34) of the I.T. Act. Therefore, he disallowed interest paid in excess of receipt amounting to Rs.41,380/- and added to the total income. 3. On appeal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een made under this head. Moreover as per the provisions of section 57 apart from above other basic conditions which requires to be fulfilled are (i) the expenditure should not be in the nature of capital expenditure. (ii) The expenditure should not be of personal in nature,. (iii) The expenditure should have been incurred in the relevant accounting year etc. (2) For the second inference, it is clarified that from the details of the interest account your honour will appreciate that interest had been charged @ 10% to 12% whereas interest had been paid @ 6% to 12% only. One payment is made @ 15% amounting to Rs. 24,182/- out of total interest income of Rs.5,36,603/-, Interest of Rs.62,709/- is paid @ 6%. And there is net income of Rs.1,61,440/-. Thus, the contention that interest bearing funds are diverted is not correct. Moreover your honour would appreciate that in normal commercial activities, it is not the case that you always get the funds exactly on the day you need. You have to keep your safety Margin and Keep certain funds to free of interest to grab the opportunity whenever it comas in reducing interest market scenario, the cost at which you hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeding u/s. 271(1)(c) of the I.T. Act. 5. At the time of hearing before us, on behalf of assessee Shri S.N. Soparkar, ld. Sr. counsel appeared and furnished the detailed submissions filed before the Learned Commissioner of Income Tax (Appeals). He argued that in para 3 of the assessment order, the Assessing Officer observed that the assessee made various deposits at lower rate of interest and paid interest on unsecured loans at higher rate. In this way, the assessee has diverted the interest bearing fund to non-interest bearing advances. He contended that on this basis, no disallowance can be made by invoking the provisions contained in section 10(14A) of the Income Tax Act, 1961. He submitted that the assessee has earned dividend income of Rs.41,380/- only, which is exempt under section 10(34) of the Income Tax Act, 1961. In the assessment order, there is no finding that money borrowed on interest is used for making investment in shares on which assessee earned dividend income of Rs.41,380/- only, therefore, Learned Commissioner of Income Tax(Appeals) ought to have deleted the small disallowance of interest amounting to Rs.46,876/-. 6. On the other hand, Shri K. Madhusud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the sides, we have carefully gone through the orders of authorities below. The Hon'ble Supreme Court in the case of Seth R. Dalmia vs.- CIT (1977) 110 ITR 644 (SC) held that before section 57(iii) can be apply, the following condition must be fulfilled :- The expenditure must have been incurred solely and exclusively for the purpose of earning income or making profit. The expenditure should not be in the nature of a capital expenditure. The amount in question should not be in the nature of personal expenses of the assessee. The expenditure should be incurred in the accounting year. There must be a clear nexus between the expenditure incurred and the income sought to be earned. The Hon'ble Gujarat High Court also in the case of Virmati Ramkrishna vs.- CIT [1981] 131 ITR 659 (Guj.) on an analysis of statutory language used in section 57(iii) and principles laid down in the decided cases held that at page 672 of the report that following propositions clearly emerge :- In order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined. The expenditure must no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bona fide for making or earning the income. The question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law. It is pertinent to note that neither before the Assessing Officer nor before the Learned Commissioner of Income Tax (Appeals) the assessee has furnished how the money borrowed was utilized i.e. its bifurcation in giving interest-free loan or making investment in land and building, investment in shares, RBI Relief Bond, ICICI Safety Bond, 2002, etc. In these circumstances, Assessing Officer made the addition on assumption and presumption. Now the assessee is not satisfied with the amount of disallowance. We are, therefore, of the view that it will meet the end of justice, if one more opportunity is allowed to the assessee to furnish the complete details of utilization of money borrowed on interest, i.e. date on which money was borrowed, rate of interest and how much money was given on interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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