2017 (8) TMI 364 - AT - Income Tax

Loan taken utilised for acquisition of debenture - Deduction under section 57 - Income from other sources - CIT-A allowed the claim - Held that - As per the provisions of section 57 of the Act any expenditure laid out or expended wholly and exclusively for the purpose of making the income under the head Income from other sources will be allowed as deduction. The assessee has borrowed the loan in the name of housing loan but it has been utilised for investing in debentures on the interest income. Therefore, the interest expenditure incurred on borrowed loan as an expenditure laid out wholly and exclusively for the purpose of earning the interest of income under the head Income from other sources . From the judgement of case Rajendra Prasad Moody 1978 (10) TMI 133 - SUPREME Court held that the expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. Therefore, we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in allowing the claim of the assessee. We also find that the learned Commissioner of Income-tax (Appeals) has also discussed this issue in his order regarding the corporate veil and we are of the view that the assessee s predominant intention of investment in debentures was to obtain, controlling interest in the company on the ground that rate of interest to HDFC Ltd. is 10.5 per cent. wherein the assessee made the interest at 8.18 per cent. Therefore, the transaction carried out by the assessee cannot be considered to be sham and colourable devices. Therefore, we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in his action. - Decided in favour of assessee Financial expenses disallowed - disallowed on the ground that the assessee has given interest-free advance to the related concern - Held that - Where an assessee has his own funds as well as borrowed funds, then a presumption can be made that for non-business purposes funds have been made out from own funds and borrowed funds have not been used for the non-business purposes. Moreover, the assessee has established that the borrowings have been utilised for the purpose of which it was borrowed, no part of interest on this borrowing should be disallowed even if the assessee has advanced any interest-free advances. It is also a fact on record that the assessee had interest-free fund to the tune of ₹ 6,77,75,208 and out of interest-free funds the assessee has given the loans on which the interest has not been charged is of ₹ 51,35,817. Therefore, no disallowance can be made. Moreover, we find that the assessee has utilised this borrowings for the purpose of business. Therefore as per the decision of the hon ble jurisdictional High Court in the case of CIT v. Bombay Samachar Ltd. 1969 (6) TMI 2 - BOMBAY High Court which supports the case of the assessee, we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in allowing the claim - Decided in favour of assessee Allowable business expenditure - car gifted to to Shefali Garodia ex employee - Held that - Shefali Garodia was relieved from the assessee s office from August 16, 2008. The car was purchased on September 1, 2008 and in the same month of September 2008 it was transferred to Shefali Garodia s name. The terms of employment does not provide for giving any car to her. We find that the gift of car is purely gratitude. This expenditure was not incurred wholly and exclusively for the purpose of business. We also find during the course of hearing that whether the assessee has given cars to all his employees. The learned authorised representative fairly admitted that we have not given car to every employee. Therefore, we are of the view that it is a personal gift rather than a part of employment or contribution made to his business. We are of the view that every businessman is free to make the expenditure but it must be allowable subject to that it was wholly and exclusively for the purpose of business. Therefore, we are of the view that the learned Commissioner of Income-tax (Appeals) is justified in his action and our interference is not required.- Decided in favour of assessee Disallowance of amount paid to Chatrapati Shivaji Maharaj Vasthu Sangrahalaya and to American India Foundation - Held that - We find that the assessee had made payment to Chatrapati Shivaji Maharaj Vasthu Sangrahalaya as towards co-publication of the book named Indian Life and Landscape By Western Artists. The assessee has been provided 100 copies of the said book which the assessee has presented to the foreign and Indian clients who are coming to India for professional work such as business law and international taxation. Therefore, we have verified the copy of the relevant pages of the book. We are of the view that this expenditure is a business expenditure, therefore we allow the same. The assessee has paid to International Fiscal Association (IFA) which comprises of tax professionals from world over and NDA has initiated IFA-Nishith Desai Center for thought leadership in international taxation to look into the emerging issues in international taxation and find new generation solutions for cross border tax issues in a fair and equitable manner. Therefore, we are of the view that this is a genuine expenditure for professional development. Therefore, we allow the same. Hence, this ground is allowed in favour of assessee Allowable business expenditure - Held that - We find that the assessee has given the break-up of the total expenses amount of ₹ 96,70,308 pertains to sponsorship expenses and 20 per cent. amount for gift. The assessee has produced the evidence that out of the total expenses of ₹ 96,70,308 expenditure towards the conference and sponsorship of seminars and all the expenditure pertain to hotel, food and travelling expenses. Therefore, this expenditure was verified by the learned Commissioner of Income-tax (Appeals) and the learned Commissioner of Income-tax (Appeals) has rightly disallowed ₹ 27,35,250 and our interference is not required.- Decided in favour of assessee Allowable electricity expenses - legal owner of property - Held that - We find that the assessee submitted that though the premises belongs to Prantik Strategic Advisors Pvt. Ltd. but the assessee is one of the shareholders and Swathi Desai is also a director of the said company. Since the assessee-company was facing shortage of space to accommodate their employees, they have used the office premises of Prantik Strategic Advisors Pvt. Ltd. adjoining of the assessee s existing office. Therefore, the entire electricity expenses were borne by Nishith Desai Associates. The Nishith Desai Associates does not pay any compensation to Prantik Strategic Advisors Pvt. Ltd. for using the said office premises, therefore they have paid the electricity bill. We are of the view that the learned Commissioner of Income-tax (Appeals) is justified in allowing the same.- Decided in favour of assessee Disallowance of the financial expenses - CIT-A allowed claim - Held that - We find that the learned Commissioner of Income-tax (Appeals) has verified how much interest-free fund is available with the assessee and he has verified the balance-sheet at the end of the year and the learned Commissioner of Income-tax (Appeals) was of a view that the assessee has sufficient capital to give interest-free loans, therefore in our opinion the issue in controversy is covered by the decision of the jurisdictional High Court in the case of CIT v. Reliance Utility Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . Therefore, in our opinion the learned Commissioner of Income-tax (Appeals) is justified in his action and our inference is not required.- Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of deduction under Section 57 of the Income-tax Act, 1961.
2. Deletion of additions made on account of financial expenses.
3. Disallowance of business promotion expenses.
4. Disallowance of donations and contributions.
5. Disallowance of various office expenses.
6. Disallowance of salary paid to a related party.
7. Disallowance of financial expenses due to interest-free advances.

Detailed Analysis:

Issue 1: Deletion of Deduction under Section 57 of the Income-tax Act, 1961
The Revenue contended that the CIT(A) erred in deleting the deduction under Section 57 of the Income-tax Act, 1961, claimed under the head "Income from other sources" amounting to ?53,65,251. The assessee had taken a loan from HDFC Ltd. for purchasing debentures of two companies, but the AO argued that the loan was a housing loan and not for investment in debentures. The CIT(A) allowed the claim based on the Supreme Court's decision in CIT v. Rajendra Prasad Moody, which stated that expenditure under Section 57(iii) must be laid out wholly and exclusively for the purpose of making or earning income, regardless of actual income earned. The Tribunal upheld the CIT(A)'s view, emphasizing that the purpose of the expenditure was relevant, not the actual earning of income.

Issue 2: Deletion of Additions Made on Account of Financial Expenses
The AO disallowed ?2,94,754 out of total financial expenses claimed, arguing that the assessee had given interest-free advances to related concerns. The CIT(A) allowed the claim, noting that the assessee had sufficient interest-free funds and the borrowed funds were used for business purposes. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's decision in CIT v. Reliance Utility and Power Ltd., which supports the presumption that interest-free advances are made from interest-free funds.

Issue 3: Disallowance of Business Promotion Expenses
The AO disallowed ?14,43,735 spent on purchasing a Honda Civic car, gifted to an ex-employee, as it was deemed a personal gift rather than a business expense. The CIT(A) upheld the disallowance, and the Tribunal agreed, stating that the expenditure was not incurred wholly and exclusively for business purposes.

Issue 4: Disallowance of Donations and Contributions
The AO disallowed ?5 lakhs paid to Chatrapati Shivaji Maharaj Vasthu Sangrahalaya and ?12,35,250 paid to American India Foundation, arguing that these payments were not connected to the assessee's business. The CIT(A) upheld the disallowance. However, the Tribunal allowed the ?5 lakhs payment, considering it a business expenditure for enhancing professional activity, but upheld the disallowance of ?12,35,250, as it was deemed a donation not connected to the business.

Issue 5: Disallowance of Various Office Expenses
The AO disallowed portions of electricity, general office, rent, and telecommunication expenses, arguing that not all were incurred for business purposes. The CIT(A) upheld these disallowances, and the Tribunal agreed, noting that the assessee had conceded these points before the CIT(A) in earlier years.

Issue 6: Disallowance of Salary Paid to a Related Party
The AO disallowed the salary paid to the assessee's son, Suril Desai, under Section 40A(2)(b), questioning the reasonableness of the payment. The CIT(A) allowed the claim, noting that the salary was commensurate with his qualifications and experience. The Tribunal upheld the CIT(A)'s decision, finding no evidence that Suril Desai did not render services to the business.

Issue 7: Disallowance of Financial Expenses Due to Interest-Free Advances
The AO disallowed ?22,53,000, arguing that the assessee had given interest-free advances. The CIT(A) allowed the claim, noting that the assessee had sufficient capital to give interest-free loans. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's decision in CIT v. Reliance Utility Power Ltd.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, allowing deductions under Section 57, deleting disallowances of financial expenses, and allowing certain business promotion expenses while disallowing others. The Tribunal emphasized the principles of commercial expediency and the necessity of expenditures being wholly and exclusively for business purposes.