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TMI Blog2023 (5) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... hough Section 50(1) of the I. T. Act 1961 categorically states that these expenses incurred wholly and exclusively in connection with such transfer of such asset expenses will be deducted from Sale Proceeds arising even then, such expenses has been disallowed by the A.O. & confirmed by CIT(A). In light of the above said facts the disallowance of expenses amounting to Rs.1,36,140/- which is confirmed by the CIT(A) ought to be deleted. 2. The CIT(A) has also erred in confirming the disallowance of excess interest paid amounting to Rs.42,24,423/- to Elevators News Network Pvt. Ltd. The total interest which was paid to Elevators News Network Pvt. Ltd. was @18% amounting to Rs. 1,86,57,929/- & the rate of interest which was received from Mr. Anup Shyam Karnani being the Director of the Company to whom the same loan amount was advanced was @ 13.5%. This excess interest paid been @ 4.5% was disallowed u/s 36(1)(iii) of Income Tax act 1961. The loan amount which was advanced to Mr. Anup Shyam Karnani was on account of Commercial Expediency & not for Personal Purpose. As a prudent business, the Appellant agreed to reduce the rate of interest from 16.25% to 13.5% only with condition to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer has to consider only the net consideration for determining the capital profit or loss and not the gross consideration. In the given case Assessing Officer has proceeded to calculate the capital gain by considering the gross sale consideration, overlooking the related expenses incurred by the assessee. The expenses claimed by the assessee are part of such sale like commission and other dues to the society are connected with the transfer. Therefore, we direct the Assessing Officer to allow the claim of the assessee and consider to determine the capital gain or loss by considering the net sale consideration, accordingly, this grounds of appeal is allowed. 8. With regard to Ground No. 2, the relevant facts are, Assessing Officer observed that assessee has taken loan from M/s. Elevators News Network Pvt. Ltd. (in short "ENNPL") and paid interest @18% and he further, observed that assessee has given a huge loan to one of its Director Mr. Anup Shyam Karnani and charged the interest @13.5%. When the assessee was asked to substantiate on the above transactions, assessee filed its submissions. After considering the submissions of the assessee the Assessing Officer rejected the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till date on which such asset was first put to use, shall not be allowed as deduction. Explanation Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause." 3) The sub section has three important words or phrases that are core to understanding of this Section I.e. Interest, (1) Borrowed and, (iii) For the purpose of Business or Profession. In the following paras we would elucidate the meaning of these with reference to this particular section (1) Meaning of "Interest" - The definition of interest in Section 2(28A) means "interest payable in any manner in respect of any moneys borrowed or debt incurred. But for Section 36(1)(ii), "interest is restricted to that on money borrowed and not on debt incurred. In simple words, the essence of interest is that it is a payment which becomes due because the creditor has not had his money at his disposal, It may be regarded either as representing the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe than the expression occurring in Section 57(ll). Thus, meaning thereby that the scope for allowing a deduction under Section 36(1)(iii) would be much wider than the one available under Section 57(iii). 4) This phrase, as held by many legal pronouncement is the most important yardstick for the allowability of deduction Under Section 36(1)(iii) of Income Tax Act, 1961. While explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs CIT(A), Chandigarh reported in 288 ITR 1 has used the word "commercial expediency By using this phrase Hon'ble Supreme Court has given a new dimension and clarified the concept further in the judgement the Supreme Court has defined commercial expediency as "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" 5) Further, following this judgement the High Court of Delhi, in the case of "Punjab Stainless Steel Inds. Vs. CIT 324 ITR 396, has further elaborated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g income, profits or gains" and this has been the consistent view of the court. 10) Further, it has been expressed in the same order that "In our opinion, the decisions relating to section 37 of the Act, will also be applicable to section 36(1)(ll) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for "commercial expediency" and it is immaterial if a third party also benefits thereby- 11) a) Further, the Honourable Supreme Court in the above mentioned case of S.A. Builders Ltd. has also relied on in the case of Atherton Vs British Insulated & Helsby Cables Ltd. (1925) 10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case (Supra) has been approved by this Court in several decisions e.g. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 2012 b) Further during the financial year ended 31st March 2013 the interest amount which was provided was to the extent of Rs.1,43,57,181/- and the balance which was outstanding as on 31st March 2013 was Rs.10,39,39,147 (Net of TDS). No amount was repaid to the Lender during the financial year ended 31/3/2013 i.e. neither the interest nor the principal amount c) Further during the financial year ended 31st March 2014 the interest was provided by the Appellant to the Lender was to the extent of Rs.1,86,57,929/- and balance which was outstanding as on 31st March 2014 (Net of TDS) is Rs. 12,23,89,766, Further, even during the financial year ended 31st March 2014, the Appellant couldn't pay to the Lender neither the Interest nor the principal amount. 15) a) Further it wouldn't be out of place to inform you that the Appellant had also borrowed the funds from Regaliaa Buildtech & Services Pvt. Ltd. (RBSPL) during the financial year ended 31st March 2011. The credit balance which was outstanding as on 31st March 2012 in the books of appellant in the name of Regaliaa Buildtech & Services Pvt Ltd. was Rs. 1,25,28,824/- (Net of TDS). This balance included interest on the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder u/s 143(3). e) Now this clearly indicates that the amount of interest which was paid in respect of capital borrowed was for the purpose of business or profession hence deduction was allowed u/s 36(1)(ii) of the Income Tax Act while computing the Business Income as per the provisions of section 28 of the Income Tax Act. f) Since the interest which is received from Mr. Anup Shyam Karnani was offered for tax under the head "Income From Business & Profession" this clearly indicates that the Loan given to Mr. Anup Shyam Karnani was for Business Purpose Only and not for any other reason. Though Mr Anup Shyam Karnani was a director of the company still the money was advanced to him for Business Purpose only and not for Private Purpose. g) Hence the Appellant had incurred the business expenditure of the Interest paid to Lenders which was paid voluntarily for commercial expediency and it was immaterial whether the third party i.e. the Borrower i.e., Mr. Anup Shyam Karnanl also benefited from Lending the same amount to him 17) a) Further in the financial 2013 the balance which was outstanding in the books of the Appellant in the name of Elevator News Network Pvt. Ltd. was Rs. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expediency. In light of the above said facts and circumstances of the case no disallowance of interest should be made which is paid by the Appellant to the Lenders. 19) Though the entire facts of the case which is mentioned above in para 16, 17 & 18, was conveyed to the Assessing Officer still he disallowed the interest of Rs. 48,11,168/- for the reasons mentioned in para 5 & 6 of his Assessment Order passed u/s 143 (3) dated 5th December 2016. 20) a) On page 7 para 6 of the Assessing Officer has stated that in respect of interest received by the Appellant from Shri Anup Shyam Karmani, it is worthwhile to mention that section 36(1)(ii) of the Act provides for deduction of interest on loans raised for business purpose. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that loans raised were used for business purpose. If in process of examination of genuineness of such a deduction, it transpires that the assessee had advanced funds to director of the company or any other person for nominal interest, then, heavy onus is on the part of the assessee to substantiate its claim before Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer say that was diverted for Non- Business purpose when it was recorded as a Business Income c) Further the Assessing Officer submitted that the assessee company has lent the amount to the director i.e. Shri Anup Shyam Karnani with little interest i.e. @ 13.5% where as the assessee has paid interest to Elevator News Network Private Ltd. at much higher interest @ 18% To this we would like to submit that the Assessing Officer has ignored the facts that in the financial year ended 31st March 2012, the rate of interest which was obtained from the director 1.e. Shri Anup Shyam Kamani was more than the rate of interest given to the Lenders. As submitted in para 16 we have submitted that in financial year ended 31st March 2012 the Assessee has earned interest income from Mr.Anup Shyam Kamani @ 16.5% and gave interest to Lenders Le. Elevator New Network Pvt.Ltd. and Regaliaa Buildtech & Services Pvt. Ltd. @ 16%. d) Further, in the financial year ended 31/3/2013 the rate of interest which was obtained from the director i.e. 16% was the same on the rate of interest given to the Lenders i.e.. 16%. e) Finally in the financial year ended 31/03/2014 the rate of interest which was taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no Justification as to why the director l.e. Mr. Anup Shyam Karnani is a sole beneficial of receiving the loan for little interest whereas such benefit could be passed on to others as well. To this, we would like to submit that the Appellant had the same situation in the preceding two financial years, but no objection was raised by the Assessing Officer while passing the Assessment Order u/s 143(3). Now, the reason why the Assessing Officer has changed his stand is only because of the fact that appellant had taken interest from Mr. Anup Shyam Karnani @13.5% whereas it paid Interest to Elevator News Network Private Ltd. @ 18% To this we would like to submit that if the Appellant had reduced the interest from 16% to 13.5% from Mr. Anup Shyam Kamani, then it is evident that the profit of Mr. Anup Shyam Kamani had increased by 2.5%. Had Mr. Anup Shyam Karani given interest to Appellant @16% then the loss of Mr. Anup Shyam Karnani would have gone up by 2.5%. We submit herewith the Profit & Loss A/c of Mr. Anup Shyam Kamani, wherein it has declared a loss of Rs.35,85,670 Now if the interest rate would have been more than 13.5% then the loss would have gone up drastically. c) F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a director the appellant. This is for the benefit of Shri Anup Shyam Karnani and does not fall into the purview of commercial expediency. Therefore I am of the opinion that the AO has rightly disallowed the excess interest payment. Ground No. 2 is therefore disallowed." 11. Aggrieved assessee is in appeal before us, at the time of hearing, Ld. AR submitted that assessee is in the business of money lending and in this regard he submitted copies of memorandum of association and highlighted the object clause of the company. Further, he submitted that assessee has lent the money to one of the Director with the lesser interest and he brought to our notice Page No. 145 of the Paper Book which is the Assessment Order for the A.Y. 2012-13 in which the case of the assessee was assessed u/s. 143(3) of the Act with the observation that assessee is carrying on business of investment and invested the funds of the company in India and elsewhere. 12. Further, he agreed that for the purpose of lending business assessee has taken loan and also gave loan during the year and accepted that there is a difference in charging the interest with the difference of 4.5% which was given to one of the Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X
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