2022 (3) TMI 432 - AT - Income Tax

Disallowance of interest expenses - income from investment shown as Nil - as observed by AO that assessee-company had advanced interest free loan as advanced out of secured loan availed from the Bank of Baroda - interest bearing secured loan was diverted to advance interest free loan - HELD THAT - The assessee has proved complete nexus between the amount borrowed and amount invested. We note that assessing officer has not pointed out that the fund borrowed was not diverted for the purpose of making investment with Affem Rolling Pvt Ltd. We note that before lower authorities, the assessee claimed both alternatives that interest expenses is allowable u/s 36(1)(iii) or u/s 57(iii) of the Act. However, we note that assessee has not derived any business income. Therefore, assessee s claim u/s 36(1)(iii) of the Act should not be allowed, and interest expense should be allowed under section 57(iii) of the Act.We note that assessing officer has erred in holding that assessee claimed such expenses u/s 24 of the Act. It is to be noted that assessee claimed only the standard deduction @30% u/s 24(a) of the Act however the assessee did not claim any interest expenses u/s 24(b) of the Act. Based on the above facts, we note that interest expense is allowable u/s 57(iii) of the Act. Assessee has not claimed the interest expenses against the interest on refund received from the income tax department. Interest on refund has been shown in the computation of total income only for disclosure purposes and not for the purpose of set off. This is because the assessee has not lent the money to the income tax department. The assessee in fact claimed the interest expenses against the Nil return on investment made in Affem Rolling Pvt. Ltd. We note that such interest expense is allowable under section 57(iii) as relying on RAJENDRA PRASAD MOODY 1978 (10) TMI 133 - SUPREME COURT - Thus we allow the interest expenses - Decided in favour of assessee. Disallowance of expenses - assessee had claimed expenses of ₹ 9,02,504/- on account of fees of Accountant, audit fees, and general expenses etc. - HELD THAT - So far disallowance of these other expenses are concerned, we note that assessee is claiming the deduction u/s 57(iii) of the Act. The ld Counsel submits that these expenses are not relating to the property on which the assessee is deriving the rent income, but these expenses are related to the investment made in Affem Rolling Pvt. Ltd. We note that to maintain the investment portfolio the assessee has incurred expenses therefore, we are of the view that it is quite reasonable to allow 50% of these expenses - Accordingly, we allow 50% of these expenses for both the assessment years.

Summary

Issues Involved:
1. Disallowance of interest expenses amounting to ?14,74,654/-.
2. Disallowance of other expenses amounting to ?9,02,504/-.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses:

The primary issue pertains to the disallowance of interest expenses amounting to ?14,74,654/- for the assessment years 2012-13 and 2013-14. The Assessing Officer (AO) observed that the assessee had advanced an interest-free loan to Affem Rolling Pvt. Ltd., a sister concern, from secured loans availed from the Bank of Baroda. The AO held that the interest-bearing secured loan was diverted for non-business purposes and disallowed the interest expenses due to the lack of a proven nexus between the interest expenses and interest income.

Upon appeal, the CIT(A) upheld the AO's decision. The assessee contended that the interest-free loan was advanced from its own funds and the borrowed funds were used for business purposes. The assessee further argued that the interest expenses should be allowed under Section 57, Section 36(1)(iii), or Section 37(1) of the Income Tax Act, 1961.

The Tribunal examined the facts and noted that the assessee had indeed incurred the interest expenses and had filed its return of income declaring total income at ?10,58,040/-. The Tribunal found that the investment in Affem Rolling Pvt. Ltd. was made out of the loan taken from Bank of Baroda and that the assessee had demonstrated a complete nexus between the borrowed funds and the investment. The Tribunal concluded that the interest expenses were allowable under Section 57(iii) of the Act, referencing the Supreme Court decision in Rajendra Prasad Moody (115 ITR 519), which held that the expenditure need not result in income to be deductible under Section 57(iii).

2. Disallowance of Other Expenses:

The second issue concerns the disallowance of other expenses amounting to ?9,02,504/- incurred by the assessee for the assessment year 2012-13. These expenses included fees for accountants, audit fees, and general expenses. The AO disallowed these expenses, and the CIT(A) confirmed the disallowance.

The assessee argued that these expenses were incurred to manage the investment in Affem Rolling Pvt. Ltd. and should be deductible under Section 57(iii) of the Act. The Tribunal agreed that these expenses were related to maintaining the investment portfolio and deemed it reasonable to allow 50% of these expenses. Consequently, the Tribunal allowed 50% of the expenses, amounting to ?4,51,252/- for the assessment year 2012-13 and ?5,37,688/- for the assessment year 2013-14.

Conclusion:

The Tribunal allowed the interest expenses of ?14,74,654/- for the assessment year 2012-13 and ?13,96,831/- for the assessment year 2013-14 under Section 57(iii) of the Income Tax Act. Additionally, it allowed 50% of the other expenses, amounting to ?4,51,252/- for the assessment year 2012-13 and ?5,37,688/- for the assessment year 2013-14. The Tribunal clarified that this adjudication was based on the peculiar facts and circumstances of the case and should not be treated as a precedent for other assessment years. Both appeals by the assessee were allowed to the extent indicated.