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TMI Blog2013 (1) TMI 425X X X X Extracts X X X X X X X X Extracts X X X X ..... COURT) it is held that the authorities should have ensured as to whether the interest free loan was given to the sister concern (which is a subsidiary of the assessee) as a measure of commercial expediency and if it was, then it should have been allowed. But in the present case, the issue of commercial expediency in advancing interest free loan to the sister concern has not been considered by the authorities below as assessee has neither submitted any details pertaining to the financial charges and interest as claimed in the Profit & Loss account nor explained the purpose of interest bearing loan and its use for commercial expediency and never furnished the source of funds of investment yielding tax free interest and dividend for the assessee. The onus is on the assessee to prove that the expenditure or loss is admissible. The assessee has to prove that the expenditure or loss claimed is an admissible deduction (Commissioner of Income Tax v Calcutta Agency Ltd. (1950 (12) TMI 4 - SUPREME COURT). If the assessee does not prove or fails to prove that the deduction is admissible, then the inference goes against him/her (Commissioner of Income Tax v Ashwani Kumar Liladhar (1996 (7) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valid basis for disallowance of the same. 3. Brief facts giving rise to this appeal are that the assessee s case was selected for scrutiny and a notice u/s 143(2) of the Income Tax Act, 1961 (for brief the Act) was issued and served on the assessee. During the assessment proceedings, the assessee s representative contended the proceedings but did not produce the books of account and vouchers, hence, in absence of books of account and vouchers pertaining to expenses claimed in P L account, the Assessing Officer disallowed the expenses and added back to the income of the assessee. The Assessing Officer also disallowed the credits shown in the balance sheet u/s 68 of the Act and added back to the income of the assessee. The Assessing Officer finalized the assessment with the taxable income of Rs.1,86,48,070 as against the returned negative income (loss) of Rs. 83,12,660/-. 4. The aggrieved assessee filed an appeal before the Commissioner of Income Tax(A)-XXIV which was partly allowed. The ld. Commissioner of Income Tax(A) upheld the action of the Assessing Officer with regard to disallowance on the loss of Rs.25,52,839/- on the sale of imported car and also upheld the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Apropos ground no.2, the assessee s representative submitted that the authorities below were justified in not accepting the claim of interest amounting to Rs.29,34,984 by making reference to provisions of sec. 14A, 36(1)(iii) and 43B(d) of the Act. The assessee s representative submitted that the claim of interest was permissible deduction under the law and there was no valid reason or basis for disallowance of the same before the authorities below. The AR also submitted that the Commissioner of Income Tax(A) wrongly applied the ratio of judgment in the case of Metro Exporters Ltd. vs ITO (2009) 29 SOT 531 (Mumbai). The assessee s representative vehemently submitted that the total interest claimed by the assessee was debited to Profit loss account. Thus, it should be allowed as revenue expenditure for the purposes of business and its disallowance is not sustainable. 10. Ld. DR replying to the above contention submitted that in the case of Metro Exporters Ltd., it was held that so long as the amount borrowed is used for business, the interest on such borrowing is eligible to be deducted while computing the total income from business and the object of Section 36(1)(iii) is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n till now, so the bank has put this advance as NPA. Now, the matter is pending in the Recovery Tribunal. 5.1 The balance sheet of the assessee reveals that the assessee has Invested Rs. 1,05,39,000/- in shares and advanced Rs. 80,11,229/- to its sister concerns. These investments and advance do not generate any income chargeable to tax. The AR has submitted the copy of the assessment order for AY 1994-95 In support of his claim that the investments in shares have been done out of capital of the firm and not from the bank loan. The loan and 0D in aggregate relevant for this year is Rs. 1,63,36,132/-. Accrued interest thereon is Rs. 34,60,386/-. 5.2 I have carefully considered the submission of the AR and perused the case record. In this case, this disallowance is justified on prorating of the direct and or indirect expenditure also. The words used in section 14A are in respect of expenditure incurred by the assessee in relation to income, which does not form part of total Income under this Act. These words encompass within their ambit direct as well as indirect expenses. In fact, provisions of law as contained in section 14A(3) make it clear that indirect expenses also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which would never declare dividend and the assessee can claim interest payable against that loan against its other business receipts. But it is not justified as it is not the Intention of the legislature. If provisions of law contained under section 14A and diction of section 14A is perused, It Is clear that section 14A codifies the well accepted principle of taxation that if income Is not taxable, no expenditure either direct and or indirect what so ever, in relation to such income can be med against taxable income. The section 14A codifies the well-recognized principle of taxation which is as per norms of accountancy and law which may be culled out from various decisions of the Hon'ble Courts and it encompasses any expenditure incurred in relation to income which is not Includible in total Income. Such income not Includible in total income may be subject matter of exemption, deduction or may be otherwise, non-taxable. 5.4 When a person borrows funds he exposes himself to certain risks by way of obligation to repay capital, to pay interest on such monies borrowed. When a person borrows funds obviously he sees himself as a businessman because he anticipates that what borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Interest is also not allowable u/s 43B(d) of the Act. 5.7 The total interest debited In the P L account is Rs. 29,34,984/-. Thus, following the judgments In the case of Dagga Capital, special bench, Metro Exporters ltd (supra) and provisions of sections 14A, 36(1)(iii) and 43B, I hereby upheld the disallowance of interest of Rs 29,34,984/-. 13. The assessee s representative relied on the judgment of ITAT, Kolkata, Third Member Bench in the case of S.P. Jaiswal Estate P. Ltd. vs Commissioner of Income Tax reported as (2012) 74 DTR (Kolkata) T.M. (Tribunal) 294 wherein it was held that interest on borrowed capital claimed as business expenditure and at the same time where the assessee has advanced interest free loans to sister concern, then if the profit of the assessee company in the relevant year is far more than the total interest free advances, then it is to be presumed that the entire interest free advances were given out of interest free funds available with the assessee. Therefore, no part of borrowed funds can be said to have been diverted as non-interest bearing advance to the subsidiary companies and consequently no disallowance can be made out of interest paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer for the reason that the assessee had given interest free loans to another allied concern. In this judgment, it was clearly held that so long as the amount borrowed is used for business, then interest paid on such loans is eligible to be deducted while computing the income from business. Clarifying the object of Section 36(1)(iii) of the Act, it was also held that this provision is not to enable the assessee to make large borrowings and create interest liability in the year of borrowal and subsequent years on one side and to divert the borrowed funds by giving interest free loans to its group concern, relatives and personal use of the assessee. In the case of Metro Exports Ltd. (supra), it was finally held that the interest paid on the borrowal to the extent of advance and investment in shares is not allowable u/s 36(1)(iii) of the Act. 18. The assessee s representative submitted that the financial charges claimed by the assessee in P L account cannot be disallowed because the assessee has not made any new investment during the year under consideration. Replying to the above submissions, the DR admitted that as per balance sheet, the investment in financial year 2001- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest and the investment in the shares and funds out of dividend proceeds, and in view of this finding of fact, disallowance u/s 14A was not sustainable, therefore, this judgement was given in a peculiar circumstance and fact when the assessee set off the expenditure on interest against the income and dividend proceeds, it was held that further disallowance u/s 14A of the Act was not sustainable. But in the present case, we are unable to see any factual situation that the assessee has set off interest expenditure (financial charges) against the tax free income from interest and dividend proceeds raised through investment. Therefore, we respectfully hold that the benefit of the ratio of this judgement is not available to the assessee in the present case. 22. The assessee has relied on the judgment of Hon ble Jurisdictional High Court of Delhi in the case of Commissioner of Income Tax vs Bharati Televenture Ltd. reported as (2011) 331 ITR 502(Delhi) wherein it was held as under:- Held, dismissing the appeal, that the order of the Commissioner(Appeals) and the Tribunal showed that the assessee was maintaining a bank account with mixed common funds in which all deposits and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister con-cern (a subsidiary) as interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is 'for the purpose of business' It has been consistently held in the decisions relating to section 37 that the expression 'for the purpose of business' includes expenditure volun-tarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Thus in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case [1925] 10 TC 155 (HL) has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business purpose, the disallowance is not sustainable. The DR further submitted that in the present case, the situation is different because the assessee has taken interest bearing loans and at the same time he has voluminous investment in shares/securities which accrue in tax free income in the hands of the assessee. 25. On careful consideration of above submissions and citations before us, in the cases of S.A. Builders (supra) and Madhav Prasad Jatia (supra), the Hon ble Apex Court held that the authorities should have ensured as to whether the interest free loan was given to the sister concern (which is a subsidiary of the assessee) as a measure of commercial expediency and if it was, then it should have been allowed. But in the present case, the issue of commercial expediency in advancing interest free loan to the sister concern has not been considered by the authorities below. In the present case, assessee has neither submitted any details pertaining to the financial charges and interest as claimed in the Profit Loss account amounting to Rs.29,34,984/- nor explained the purpose of interest bearing loan and its use for commercial expediency and never furnished the sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment. 30. As we have already observed, in terms of aforesaid decisions of Hon ble Jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deduction is allowable, the onus that deduction is not admissible shifts to the tax authorities. 33. In the case in hand, since this fact is not in dispute that the assessee did not submit books of account and vouchers before authorities below to show that the interest bearing loans were taken for business purpose and indeed used for the same and investment which accrue tax free income were made from difference source of funds and which has no relation to interest bearing loans. At the same time, we also observe that there is no material before us to show that the Assessing Officer had an opportunity to examine the issue of claim u/s 36(1)(iii) and to determine the amount of expenditure incurred in relation to income which does not form part of total income in accordance with such method prescribed in section 14A(2) of the Act. 34. In view of above discussion, we are inclined to hold that the issue of disallowance of financial charges (interest) requires de novo adjudication in accordance with law in the light of our aforesaid observations and various judicial pronouncements at the end of Assessing Officer and we restore the issue to his file. We direct that after allowing su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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