2015 (6) TMI 207 - AT - Income Tax

Disallowance of interest expenditure under section 57(iii) - Held that - In view of the facts in issue as well as the following judgment of CIT vs. Rajendra Prasad Moody (1978 (10) TMI 133 - SUPREME Court), the judgment of CIT vs. Darashaw & Co. Pvt. Ltd. (2014 (5) TMI 940 - BOMBAY HIGH COURT) and CIT vs. M. Ethurayan (2004 (7) TMI 39 - MADRAS High Court ), we find that the interest expenditure on the borrowed amount used for the purpose of investment in the shares is an allowable deduction under section 57(iii). Decided in favour of assessee.

Issues Involved:
1. Confirmation of the assessment of total income.
2. Disallowance of interest under section 57(iii).
3. Non-adjudication of grounds related to sections 36(1)(iii) and 37.
4. Classification of director remuneration as salary.
5. Inclusion of minor children's interest income.
6. Levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Confirmation of the Assessment of Total Income:
The assessee contested the confirmation of the total income assessed by the CIT(A) at Rs. 58,35,060/- against the returned income of Rs. 22,49,398/-. However, this ground was not pressed during the hearing and was dismissed accordingly.

2. Disallowance of Interest under Section 57(iii):
The primary issue was the disallowance of interest expenditure amounting to Rs. 35,88,438/- under section 57(iii). The AO observed that the assessee used interest-bearing funds for giving interest-free loans and making investments in shares, disallowing the interest expenditure on the grounds that it was not incurred for earning income assessable under "Income from other sources."

The assessee argued that the borrowed funds were used for loans and investments aimed at earning interest, dividends, and capital gains. The assessee relied on the Supreme Court judgment in "CIT vs. Rajendra Prasad Moody" to assert that the purpose of the expenditure, not the actual income earned, is relevant for deduction under section 57(iii).

The Tribunal noted that the AO emphasized actual income rather than the potential income from the investments. It upheld the principle that expenditure laid out for earning potential income qualifies for deduction under section 57(iii), even if no actual income is earned during the year. The Tribunal concluded that the interest expenditure on borrowed amounts used for investments in shares is allowable under section 57(iii).

3. Non-adjudication of Grounds Related to Sections 36(1)(iii) and 37:
The assessee contended that the CIT(A) failed to adjudicate the alternative grounds regarding the allowance of interest under sections 36(1)(iii) or 37. However, this ground was not pressed during the hearing and was dismissed.

4. Classification of Director Remuneration as Salary:
The assessee argued that the CIT(A) did not adjudicate the ground contesting the classification of director remuneration as salary instead of "Income from Business or Profession." This ground was also not pressed during the hearing and was dismissed.

5. Inclusion of Minor Children's Interest Income:
The assessee contested the inclusion of minor children's interest income in the total income. This ground was not pressed during the hearing and was dismissed.

6. Levy of Interest under Sections 234B and 234C:
The assessee challenged the levy of interest under sections 234B and 234C. This ground was not pressed during the hearing and was dismissed.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, specifically in relation to the disallowance of interest under section 57(iii). It upheld that the interest expenditure on borrowed amounts used for investments in shares is an allowable deduction under section 57(iii). The other grounds were dismissed as not pressed. The order was pronounced in the open court on 15.05.2015.

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