TMI Blog2005 (2) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was not commenced. The assessee-company had raised funds to be utilized in the construction of the said project from various financial institutions and was paying substantial interest on such funds. The aforesaid funds were partly utilized for the project construction work and the surplus funds were invested by the assessee in term deposits with a view to earn interest. During the course of assessment proceedings, it was claimed that whatever interest income was earned by the assessee is deductible from the cost of the project. In the original assessment made by the Assessing Officer, this argument was rejected having regard to the Supreme Court judgment in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The Assessing Officer was of the view that the gross interest receipts had to be brought to the charge of tax as income from other sources. Accordingly, the assessments were completed. The assessee appealed unsuccessfully to the CIT(A). 3. The assessee-company filed appeals before the ITAT which were disposed of vide consolidated order dated 20-8-2001 in 1TA Nos. 6207/Mum./99, 4079/Mum./2000 and 1731/Mum./2000. Copy of this order is com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the file of Assessing Officer and allow the ground for statistical purposes." From the above, it is seen that the Tribunal approved in principle the proposition that if any expenditure including interest paid on borrowed funds is allowable under section 57(iii) against the gross interest income, the same has to be allowed. For quantification of such expenditure, the issue was restored to the Assessing Officer for all the three years. 4. The Assessing Officer has considered in detail the legal aspects of the issue and has ultimately recorded a finding that the Supreme Court decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd., was squarely applicable and no expenditure is allowable under section 57(iii) for the simple reason that such expenditure cannot be said to be laid out or expended wholly and exclusively for the purposes of making or earning such income. The Assessing Officer was of the view that the funds were raised by the assessee with the purpose of project construction and not for the purpose of investment in term deposits. The assessee's claim was, therefore, outright rejected by the Assessing Officer without going into the details furnished by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracts of the type envisaged by section 80-O are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contract. For purposes of income-tax, the principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the contexts: (a) of the capital and revenue constituents comprised in them; (b) portions of expenditure attributable to business and non-business purposes; (c) of places of accrual or arisal; and (d) of agricultural and non-agricultural elements in such receipts or payments." It is submitted by the ld. counsel that in the assessee's case also the question is how much expenditure is required to be capitalized as cost of project and how much expenditure is deductible under section 57(iii) while computing the income under the head 'other sources'. It is submitted that the Revenue authorities have not raised any doubt about the deployment of borrowed funds in term deposits for earning interest. It is, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r opinion, it was rightly held by the Nagpur Judicial Commissioner in Nagpur Electric Light Power Co. v. CIT that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure." The ld. Counsel also led us through the statement of allocation of cost of borrowing and administrative expenses which are compiled in the Paper Book. 6. The ld. DR, Shri Mahesh Kumar strongly supported the orders of the Revenue authorities and emphasized the phraseology of section 57(iii), which may be reproduced below: "57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely:- (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income" The ld. DR contended that admittedly the funds were raised by the assessee for the purposes of setting up and construction of the project. Thus, all the borrowed funds were intended to be used only for the aforesaid business purpose and such expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there are abnormalities attaching to such transactions. It is not for the Court to go into appreciation of evidence of circumstances attaching to a transaction to determine whether the Tribunal was justified in arriving at the finding that a certain payment was not exclusively for the purpose of the business of the assessee as this is wholly a question of fact and not of law." The ld. DR further relied on the Bombay High Court decision in the case of CIT v. Globe Theatres (P.) Ltd. [1980] 122 ITR 240 and invited our attention to the relevant part of the ratio of this case, which is reproduced from the headnote: "In order to decide whether a particular amount is laid out or expended wholly or exclusively for the purposes of the assessee's business, the test to be applied is: Has the expense been incurred with the sole object of furthering the trade or business interest of the assessee, unalloyed or unmixed with any other consideration? If the expense is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from other sources - Whether deduction claimed under section 36 can be allowed to be deducted from income from other sources while computing income under section 56 - Held, no - Whether interest paid could be termed as expenditure incurred wholly and exclusively for earning income from other sources - Held, no - Whether assessee would be entitled for netting between interest income and interest paid on borrowed funds - Held, no." The ld. DR also submitted that the judgments which have been relied upon by the ld. counsel for the assessee were rendered in different contexts and therefore the ratio of these cases cannot be directly applied to the case of the assessee. 7. We have given a careful consideration to the elaborate arguments submitted on behalf of the assessee appellant as also on behalf of the Department and have gone through the facts in the light of the legal position as emerging from the various judicial pronouncements with which we have been assisted by both the parties. There is no gainsaying the fact that the Tribunal, while restoring this issue to the Assessing Officer vide its order dated 20-8-2001, felt that if the pre-operative expenses including interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd payments. The Hon'ble Gujarat High Court, in the case of H.K. (Investment) Co. (P.) Ltd., categorically held that the common expenses have to be apportioned as allowable separately under sections 36(1)(iii) and 57(iii). The Supreme Court, in the case of India Cement Ltd. observed that what is important is the actual use of the loan and not the intention or motive at the time of raising the loan. In other words, if a loan is raised for one purpose, but the same is utilized for some other purposes, while considering the deductibility of interest on such loan, the actual user must be considered rather than the motive or intention at the time of raising the loan. The mandate of this decision is very clear. 8. The ld. DR has laid great emphasis on the phraseology of section 57(iii) and has relied upon the Bombay High Court decision in the case of Globe Theatres Pvt. Ltd. and the Delhi High Court decision in the case of Siddho Mal Sons. In these cases, the Hon'ble Courts were called upon to adjudicate the deductibility of certain expenses under section 10(2)(xv) of the Indian Income-tax Act, 1922, which corresponds to section 37(1) of the Income-tax Act, 1961. In these cases, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi Jaikrishna. In this case, the assessee derived income from other sources in the shape of interest, dividend etc. Out of the interest of Rs. 26,986 paid by the assessee on monies borrowed, the ITO disallowed a sum of Rs. 10,239 on proportionate basis on the ground that to that extent the loan was used to discharge the assessee's liability for payment of income-tax, wealth-tax and annuity deposits. In these circumstances, it was held by the Supreme Court that the Department was justified in disallowing the interest on the loan, which was not incurred for the purpose of making investment yielding interest and dividend income. Similarly, in the case of Ms. Ila R. Ambani, the ITAT, Mumbai Bench observed that the interest paid on loan used for acquiring jewellery cannot be said to have been incurred for making or earning income chargeable to tax under section 56. In our view, the assessee's claim for apportionment is clearly supported from the various judicial pronouncements and we feel that the view expressed by the ITAT, Indore Bench, with due respect, cannot be accepted having regard to the Supreme Court and Gujarat High Court decisions relied upon by the ld. counsel for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (Rs.) Pre-operative income 1,29,76,992 (details as per separate statement) Weighted Investment Funds (annualized) (I) 8,03,10,239 (Funds Invested X Period/365) Average annualized yield Carrying cost of rupee funds raised (A) 16.16% (details as per separate statement) Weighted Funds Raised (annualized) (B) 21,97,66,255 (Total Funds used X Period utilized/365) Cost of Funds raised (C)=A/B 12.24% Cost of Funds invested I+C 98,27,713 Administrative Costs (X) (As per company accounts for the year) (to the extent related to corporate finance activities) Salaries and wages (20%) 28,69,456 5,73,891 Printing and stationery (25%) 1,53,876 38,469 Postage and telephone (25%) 5,05,055 1,26,264 Corporate publicity charges (20%) 2,24,180 44,836 Conveyance, vehicle and local travelling (20%) 16,47,434 3,29,487 Professional expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est income, which flows from the term deposits made with the banks. Therefore, in our view, the administrative expenses or part thereof cannot be allowed under section 57(iii). Only interest expenditure is required to be apportioned to the investment which are yielding interest income to the assessee. The Assessing Officer is, therefore, directed to work out the quantum of interest expenditure, which is allowable under section 57(iii) on pro-rata basis as per the details already made available by the assessee and reproduced by the ld. CIT(A) in his order, in respect of all the three assessment years. Opportunity shall be allowed to the assessee. 9. In ITA No. 2986 for the assessment year 1993-94, the ground No. 2 raised by the assessee is as under: "The ld. CIT(A) erred in not adjudicating the ground raised before him of inclusion of the additional tax of Rs. 3,83,673 levied under section 143(1A), in the demand raised in consequence of the impugned assessment." 10. We find that no such ground of appeal was ever raised by the assessee before the CIT(A) as per grounds of appeal accompanying Form No. 35, which is on record. Naturally, the ld. CIT(A) had no occasion to deal with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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