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TMI Blog1997 (6) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, before us, the date should be 10-4-1987. However, the difference in dates is not material and what is significant is that it is after the lease deed dated 5-3-1987 between the assessee and the HUF. 3. Further, the Union Bank of India advanced a loan of Rs.11,40,000 to the assessee on the same date of 10-4-1987. The date is being taken as submitted by the ld. counsel for the assessee before us and which is supported by the bank account copy on interest rate of 15%. The interest paid during the year was Rs.1,54,463. Out of this rent, the assessee deposited Rs.7,75,000 with the HUF landlord, which was interest-free. 4. In the assessment order, income from rent, received from the Union Bank of India, has been assessed under the head "other sources". The assessee claimed various expenses against the rental income which, inter alia, included interest payment of Rs.1,54,463 to the Union Bank of India. The Assessing Officer issued a letter to show cause why interest had not been charged by the assessee on the deposit of Rs.7,75,000 with the HUf landlord and why interest payment on loan to the same extent to the Union Bank of India should not be disallowed. He noticed that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of ITO v. Amora Chemicals (P.) Ltd. [1987] 29 TTJ (Ahd.) 559 (TM). 7. The ld. counsel also submitted that the interest-free deposit was an indicator that the rent is the low and for this proposition relied on a decision of the Calcutta High Court in CIT v. Satya Co. Ltd. [1994] 75 Taxman 193. 8. It was further submitted that in the Wealth-tax Act, Schedule III had been introduced w.e.f. 1-4-1989 and rule 5 was concerned with determination of gross maintainable rent. There was a provision for computation of presumptive rate of interest on interest-free deposit @ 15% as an integral part of rent to be added to the ostensible rent. Thus, he submitted that such transactions were reconised by the Courts as well as the Wealth-tax Rules and, therefore, should be accepted in this case also. 9. He submitted next that the immediate purpose of payment of interest to Union Bank of India was earning of income and, therefore, deduction for the interest should be allowed under section 57(iii) of the Act as held in CIT v. Maharani Shri Kesarkunwerba Saheb of Morvi [1958] 33 ITR 349 (Bom.) and the decision of the Calcutta High Court in CIT v. Model Mfg. Co. (P.) Ltd. [1980] 122 ITR 76 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held that the rent was a business income. Further, a loan was advanced to landlord of the assessee and the assessee, as per agreement, was to pay interest (a) 6% to the landlord HUF. On the other hand, the assessee received loan from the bank at 15% and advanced to the landlord HUF. It was a part of the agreement that additional, floors, as and when constructed, were to be made available to the assessee at the same rate of rent. It was held that the objection of granting loan to the landlord HUF at a cheaper interest was for obtaining additional floors on rent and, therefore, it was a business interest. The facts in the present case are different. The rental income was not business income. No income in future has been shown to be receivable by the assessee by making interest-free deposit. Thus, this case also is distinguishable and does not help the assessee. 14. In the case of Satya Co. Ltd, the question was computation of annual value under section 22 of the Act, i.e., income from the house property. It was held that notional interest on deposit made by the tenant with the landlord could not be added to the annual letting value of the premises under the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel for the assessee has accepted that these were not filed either before the Assessing Officer or the CIT(A). No reason has been advanced before us why it should be admitted before us as evidence and we decline to consider it under rule 29 of the Appellate Tribunal Rules, 1963. 17. The principles for allowing deduction under section 57(iii) of the Act have been rightly pointed out by the ld. counsel for the assessee, as laid down in the two cases relied upon by him. Applying those tests, we are satisfied that interest of Rs.1,54,463 paid to the Union Bank of India on a sum of Rs.7,75,000 cannot be treated as having been laid out or expended wholly and exclusively for the purpose of earning income from rent. The disallowance is, therefore, upheld. 18. For the same reason, disallowance of interest of Rs.1,16,250 is upheld in the case of Late Hanuman Prasad Shroff through legal heirs (ITA No. 193/Pat./1993). 19. In the case of Shri Abhay Kumar Shroff, there was further disallowance of Rs.7,030 out of travelling, conveyance and repairs. Expenses totalling Rs.70,308 were claimed against rental income and other income taxable under the head "Income from other sources". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The claim of the assessee and disallowance by the Assessing Officer have to be judged in the light of the provisions of section 57(iii) of the Income-tax Act and judicial pronouncement to that effect which I will be referring to in the forthcoming paragraphs. There is no dispute on the facts of the case as they have been correctly recorded by my ld. Brother. 25. Firstly, whether or not the documents placed by the assessee's counsel from pages 2 to 7 of the paper book and which is additional evidence before us is to be admitted under Rule 29 of Income-tax (Appellate Tribunal) Rules, 1963 (hereafter Rules of 1963). My ld. Brother is right that no satisfactory reasons have been advanced as to why these documents were not produced before the lower tax authorities and why the same should be admitted belatedly at this second appellate, stage in terms of rule 29 of Rules of 1963. The only submission of the assessee's counsel was that the said documents which are copies of the correspondence entered into between the assessee and the HUF landlord which are from pages 2 to 5 and pages 6 to 7 is the letter by the Union Bank of India containing terms of lease and the term regarding advancin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said head which expenditure has been incurred by the assessee for earning the income falling under this head. The total interest claimed as deductible expenditure was in a sum of Rs.2,42,817, out of which a sum of Rs.1,54,464 has been paid to the said bank which is nothing but interest paid on the loan sanctioned by the said bank amounting to Rs.11.40 lacs upon taking the sub-lease of the premises from the assessee Shri Abhay Kumar Shroff as is evident from condition No. 5 at page 7 of the assessee's paper book, now admitted as additional evidence. The Assessing Officer disallowed Rs.1,16,250 from out of total claim of Rs.1,54,464 because according to him, the assessee did not charge any interest from the landlord HUF to whom it paid Rs.7.75 lacs. At page 4 of assessment order, the Assessing Officer further stated that the sum of Rs.7.75 lacs was diverted by the assessee for non-business purposes and calculated interest at 15% on Rs.7.75 lacs and disallowed the same from out of the total expenditure at Rs.3,89,343 claimed as deductible for arriving at the net income under the head 'Income from other sources'. While disallowing this amount, the Assessing Officer has observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any income is made or earned. There is, in fact, nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain, natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure". 29. It is indeed difficult to say how after these broad and sweeping observations of the Hon'ble Supreme Court there can be any scope for creating a controversy on the application of the provisions of section 57(iii) to the facts of the instant case and still to say that the expenditure incurred for earning income chargeable to tax under the head 'Other sources' is not an allowable expenditure. 30. The Gujarat High Court in the case of Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659 after an exhaustive review of the case law on the subject of allowability of expenditure under section 57(iii) laid down the following proposition of the said reports:-- (i) in order to decide whether an expenditure is a permiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d; (x) it is not necessary to show that the expenditure was a profitable one or that in fact income was earned; (xi) the test is not whether the assessee benefited thereby or whether it was prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bona fide for making or earning the income; (xii) the question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law. 31. Applying the above tests, it is evident and clear that the sub-letting made by the assessee to the Bank was on the condition that the Bank should give a loan of Rs.11.40 lacs at 15% interest per annum. The expenditure, viz., interest to Bank was, therefore, an expenditure incurred and laid a wholly or exclusively for the purpose of earning the rental income from the Bank and which income was offered for taxation purposes as income from other sources. The said expenditure is, therefore, covered by section 57(iii) and in my view is allowable expenditure in its entirety as claimed by the assessee. No portion of interest to Bank is disallowable on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Rajendra Prasad Moody and as well satisfies the tests laid down by the Gujarat High Court in the case of Smt. Virmati Ramkrishna. 32. Though the income has been declared under the head 'Income from other sources' and payment of interest to bank is also claimed as a deduction from the sub-letting rental income from the Bank the decision of the Third Member of this Tribunal, in the case of Amora Chemicals (P.) Ltd relied upon by the assessee's counsel is not applicable yet the principle and ratio laid down therein applies to the facts of the case. In that case also the assessee took on rent few floors from the HUF landlord on low rent and also was getting interest at 6% on the amount deposited by it where as it sub-leased those floors to the Bank at a higher rate and was paying higher rate of interest, viz., 15% to the Bank on the loan sanctioned by the said Bank to that assessee, At the time of sub-letting of the floors the income in that case was not shown for taxation purpose under the head 'Income from other sources' but it was shown under the head 'Income from business' and the interest paid to the Bank was claimed as an expenditure under section 37 of the Act as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Third Member as provided in sub-section (4) of section 255 of the Act and request the Hon'ble President accordingly. Points for Reference: (1) Whether the Judicial Member is justified in admitting additional evidence from pages 2 to 7 of the assessee's paper book in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 on the ground that such additional evidence is vital and essential for rendering justice and in deciding appeals? (2) If the above additional evidence should be admitted, whether it is necessary to give the Department a reasonable opportunity of rebutting it according to the Principles of Natural Justice, and for that purpose, the matter should be restored to the file of the Assessing Officer? (3) Whether under section 57(iii) of the Income-tax Act, 1961, interest amount of Rs.1,16,250 is disallowable for reason that the assessee did not charge interest from the landlord HUF on the sum of Rs.7.75 lacs paid from out of the loan amount given by the Bank to the appellants upon sub-lease of the premises? THIRD MEMBER ORDER 1. Under sub-section (4) of section 255 of the Income-tax. Act, 1961 (hereinafter referred to as 'the Act' for brief), I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us, the date should be 10-4-1987. However, the difference in dates is not material and what is significant is that it is after the lease deed dated 5-3-1987 between the assessee and the HUF. 3. Further the Union Bank of India advanced a loan of Rs.11,40,000 to the assessee on the same date of 10-4-1987. The date is being taken as submitted by the ld. counsel for the assessee before us and which is supported by the Bank Account copy on interest rate of 15%. The interest paid during the year was Rs.1,54,463. Out of this rent, the assessee deposited Rs.7,75,000 with the HUF landlord, which was interest-free. 4. In the assessment order income from rent, received from the Union Bank of India, has been assessed under the head Other sources'. The assessee claimed various expenses against the rental income which, inter alia, included interest payment of Rs.1,54,463 to the Union Bank of India. The Assessing Officer issued a letter to show cause why interest had not been charged by the assessee on the deposit of Rs.7,75,000 with the HUF landlord and why interest payment on loan to the same extent to the Union Bank of India should not be disallowed. He noticed that there was no mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. counsel also submitted that the interest-free deposit was an indicator that the rent is the low and for this proposition relied on a decision of the Calcutta High Court in CIT v. Satya Co. Ltd. [1994] 75 Taxman 193. 8. It was further submitted that in the Wealth-tax Act, Schedule III had been introduced w.e.f. 1-4-1989 and rule 5 was concerned with determination of gross maintainable rent. There was a provision for computation of presumptive rate of interest on interest-free deposit @ 15% as an integral part of rent to be added to the ostensible rent. Thus, he submitted that such transactions were recognised by the Courts as well as the Wealth-tax Rules and, therefore, should be accepted in this case also. 9. He submitted next that the immediate purpose of payment of interest to Union Bank of India was earning of income and, therefore, deduction for the interest should be allowed under section 57(iii) of the Act as held in CIT v. H.H. Maharani Shri Kesarkunwerba Saheb of Morvi [1958] 33 ITR 349 (Bom.), and the decision of the Calcutta High Court in CIT v. Model Mfg. Co. (P.) Ltd. [1980] 122 ITR 767. 10. The ld. D.R., on the other hand, supported the order of the CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also a party observing that in this decision in the Ahmedabad Bench, the Tribunal after analysing the decision of the Apex Court as well as other High Courts on the subject held that additional evidence should be admitted if it were vital and essential for the purpose of consideration of the subject-matter of appeal and to arrive at a final and ultimate decision in a fair and just manner. Further, the Tribunal under rule 29 referred to supra, had the power to admit additional evidence in the interest of justice as also if there existed substantial cause. 8. As to whether there existing a legal justification in admitting additional evidence, as is evident, is covered by question No. 1 of the reference to the Third Member. While, the learned counsel for the assessee vehemently contended that the evidence being of essential nature and vital for the correct adjudication of the controversy was necessarily required to be admitted, its admission was opposed by the learned D.R., who supported the view taken by the learned Accountant Member. 9. I have considered the matter carefully. At the outset, I would refer to rule 29 of the Appellate Tribunal Rules, 1963 which runs as under:-- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of lease and the advance of loan of Rs.11.40 lacs. 12. If we go through the grounds of appeal taken by the assessee in these two appeals which are similar, the first ground challenges the disallowance of interest paid by the assessees in a sum of Rs.1,16,250 each to the bank which they claimed was for business purposes while held to be otherwise by the department. Similarly, the other substantial dispute in these appeals is in respect of the treatment of the amount of deposit in a sum of Rs.7,75,000 given by the Bank to the HUF, the transaction claimed in consideration of commercial expediency to enable the bank to get the premises in question at a much lower rent than the market rent. The plea further taken by the assessees is that the rental income earned by them out of the renting of the premises was quite high even after deducting the interest paid to the bank and as such, there was no justification with the department to negate their claim. On the above facts and circumstances of the case could it be said that the documents in question briefly referred to hereinbefore are not necessary from the Tribunal's view point which under section 254 of the Income-tax Act is call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, reference may be made much more authoritatively to a decision of the Apex Court in the case of K. Venkataram v. A. Seetharama Reddy AIR 1963 SC 1526, wherein their Lordships of the Supreme Court had occasion to interpret and outline the object of rule 27 of the Order 41 of the Civil Procedure Code, 1908. Interestingly, the language of Order 41 rule 27 CPC and rule 29 of the Appellate Tribunal Rules is almost the same inasmuch as with a little different wording rule 27 of Order 41 of the CPC also says that parties to an appeal shall not be entitled to produce additional evidence whether oral or documentary, in the Appellate Court. But, if, inter alia, as provided by clause (b) of clause (1) of rule 27 of Order 41 CPC the 'Appellate Court' requires any document to be produced or any witness to be examined to enable it to 'pronounce judgment' and for any 'other substantial cause', the Appellate Court may allow such evidence or document to be produced. In K. Venkataramiah's case, the Hon'ble Supreme Court held as under:-- "Under Rule 27(1), the Appellate Court has the power to allow additional evidence not only if it requires such evidence 'to enable it to pronounce judgment', b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellate Tribunal while exercising powers under rule 29 of the Appellate Tribunal Rules, 1963. 16. I am, therefore, inclined to agree more with the ld. Judicial Member and answer question No. 1 accordingly. 17. Coming to question No. 2, it may be stated that once additional evidence is required to be admitted, there could be no gainsaying that the department should be afforded reasonable opportunity of rebutting it. Audi alteram Partem is a valuable right of the parties to any lis. Nobody can be or should be condemned unheard is one of the strongest edifices on which the entire administration of justice stands. I may add further that if this evidence had been produced by the addressee before the lower authorities, surely the department had a right to rebut it and that being so could it be said that although the assessee delayed the production of evidence in question whatever be the reasons which in this case incidentally are none, and brought it, for the first time at the second appellate stage, the department has to be punished and put in a disadvantageous position. The answer to this situation is an emphatic no. A stand to the contrary cannot be seconded in law. I would, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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