2015 (12) TMI 1169 - AT - Income Tax

Disallowance of excess expenditure - Interest expenditure on borrowed capital not generating adequate revenue - Held that - The assessee as well as the lendee-company being only aware of the going interest rate (in the market), the same (arrangement) only amounted to the assessee bearing the interest burden (of the company) to that extent (i.e., to the extent of difference), or the company diverting by way of curtailing, its losses to that extent. The ld. AR would, upon this, submit that the company having incurred losses, an arrangement limiting the interest rate which it would allow to its shareholders (12% p.a.) was put in place. This, rather, only confirms what stands stated above. That the loss stands incurred not with a view to earn a positive return irrespective of its extent, but to contain the losses of the investee-company. The matter is to be looked at from the stand-point of the assessee in-as-much as it is the law as applicable to him that is to be seen. Reference to the decision in the case of Rajendra Prasad Moody (1978 (10) TMI 133 - SUPREME Court ) by the assessee is, again, misplaced. The same nowhere approves of premeditated losses. It has already been clarified that no other benefit enures to the assessee from the said loan/s. A company cannot oblige the shareholders to extend loans, much less at a concessionary rate of interest. It is only where the actual earning of income is not certain, with the purpose of expenditure being toward earning the same, that the deduction in its respect cannot be denied. In the facts and circumstances of the case, the impugned expenditure is only to contain the losses of the borrower-company, by diverting it to the shareholders to that extent. The assessee s claim is without merit, and the Revenue s stand in disallowing the excess expenditure is, for the fore-going reasons, is upheld. - Decided against assessee

Summary

Issues:
Assessment u/s.143(3) of the Income Tax Act, 1961 for the assessment year 2011-12 - Claim of deduction of excess expenditure u/s. 57(iii) - Disallowance of excess expenditure - Nexus of borrowed funds with advanced loans - Purpose of expenditure for earning income - Dispute regarding excess expenditure.

Analysis:

The appeal was filed by the Assessee against the Order of the Commissioner of Income Tax (Appeals) dismissing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 for the assessment year 2011-12. The case involved the assessee, an individual, lending monies to a company, earning interest but incurring expenses on borrowed capital and brokerage charges, resulting in a loss. The dispute centered around the claim for deduction of this excess expenditure u/s. 57(iii) based on the purpose of the loans and expenditure incurred. The Hon'ble Apex Court's decision in CIT vs. Rajendra Prasad Moody clarified that the purpose of earning income is crucial for allowing expenditure, even if the income earned is uncertain.

The Tribunal found that there was a clear nexus between the borrowed funds, interest on borrowed capital, and brokerage charges claimed as expenditure. While the assessee argued based on the decision in Rajendra Prasad Moody, the Tribunal disagreed. It noted that the borrowed funds were used to lend at a predefined interest rate, resulting in a known loss due to higher borrowing costs. The Tribunal emphasized that the expenditure incurred was to contain the losses of the borrower-company, not for earning income directly. The Tribunal upheld the Revenue's disallowance of the excess expenditure, as it was incurred solely to mitigate the losses of the investee-company, not for generating positive returns.

Ultimately, the Tribunal dismissed the assessee's appeal, affirming the disallowance of the excess expenditure. The decision was based on the understanding that the expenditure was not aimed at earning income but rather at limiting the losses of the borrower-company. The Tribunal's analysis focused on the purpose of the expenditure and the nature of the transactions, concluding that the claim for deduction of excess expenditure was without merit.