9911796707
TMI Blog2015 (11) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... usively laid out or expended for making or earning income as per mandate of Section 57(iii) of the Act rather it is vice versa. The assessee has raised the plea for the first time before us that she has given the interest free loan of 98 lacs to GPL as a measure of commercial expediency because she is the Director of the said company. However the said plea has not been verified by the authorities below. We, therefore, hold that to the extent of borrowing made from SCBL for lending to GPL of 98 lacs, the interest attributable thereof paid to SCBL shall be allowable to be set off against the interest income if the assessee is able to prove before the assessing officer that the said interest free loan of 98 lacs given to GPL has been given as a measure of commercial expediency as held by the Hon’ble Supreme Court it the case of S.A Builders (2006 (12) TMI 82 - SUPREME COURT) and hence to that extent we allow the appeal subject to verification by the assessing officer and accordingly set aside the matter to the file of assessing officer for necessary verification as detailed above and the assessee will be given proper and adequate opportunity in accordance with the principles of natura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case are that the assessee has filed its return of income on 31.03.2010, declaring total income of ₹ 29,76,148/-, which was selected for scrutiny. During the course of assessment proceedings, the assessing officer observed that assessee has shown "Income from other Sources" mainly comprising of interest and claimed deduction of interest expenditure as under:- Income from other sources: Interest received from/on Loan … 20,57,614 Fixed Deposit… 17,99,448 Savings Account 73,275 Taxable Government Bond 7,20,000 46,50,337 Less: Interest Paid on Loan …. (-) 16,68,880 Professional Tax …. (-) 2,500 Gross Total Income 29,78,957 4. The assessing officer enquired as to how the assessee has adjusted interest paid on overdrawing from The Saraswat Coop. Bank Ltd(hereinafter called "SCBL") of ₹ 16,68,880/- against the interest income of ₹ 46,50,337/- and the net amount is offered for taxation. The assessee submitted that the assessee has fixed deposit receipt with the SCBL and against the security of these FDRs, the assessee has raised loans of ₹ 1.87 crores which has been given as interest free loans/advance to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, as there were no funds immediately available, an overdraft was taken so that there would be no penal charges for pre-mature encashment of FD and also continue to earn high interest rate. If the FD was encashed and the loan was given directly, the assessee would have neither earned interest on FD nor paid interest on the overdraft. This situation is no different in the present scenario since the assessee is earning interest on FD and paying interest on overdraft. Overall the situation is the same either way. Merely because the assessee chooses to maximize his returns by adopting one of the modes of carrying out the transaction, she should not be saddled with tax liabilities which are highly disproportionate to the possible benefit that may result in the long run. The assessee requests that the intervening event of OD may be ignored by disallowing amount of interest paid on OD which is higher that interest received on FD so that there is no loss to the Revenue. In the alternative and without prejudice to the above, since the assessee's only income is that of interest, such income should be treated as income from business of money lending and treated as such. Consequently, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and offered for taxation. The assessee submitted that it has netted the interest income from FDR of ₹ 16.14 lacs as the interest income is generated out of FDR on the security of which the overdraft facility is availed against which the interest of ₹ 16,68,880/- is paid to the same bank. The assessee submitted that If the assessee would have desired it could have liquidated the FDRs with the bank and simply released the loans to these two parties namely PMIPL and GPL and hence there would not have been any income which is chargeable to tax. The assessee submitted that similar is the situation here whereby the interest income of ₹ 16.14 lacs is earned on the FDR from the bank and the interest of ₹ 16.69 lacs is paid back to the same bank on the overdraft facility of ₹ 1.87 crores availed from the same bank against the security of FDR's of ₹ 2 crores and hence netting of the interest should be allowed for charging the same to taxation. The assessee referred to the provisions of section 57(iii) of the Act and stated that section 57(iii) of the Act itself stipulates that any expenditure incurred to earn an income chargeable to tax u/s 56 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT Vs. V. Gopinathan [(2001)248 ITR 449], whereby the Hon'ble Supreme Court has clearly held that expenditure can only be allowed u/s 57(iii) of the Act, if the same is expended to earn the income and not vice-versa as there is no provisions under the Act for allowing so and the interest so generated on term deposit has to be offered for taxation without adjusting interest paid on borrowing against the said term deposits. Ld. DR further contended that the decision of Hon'ble Supreme Court in the case of ACG Associated Capsules (supra), relied upon by the assessee is not applicable to the facts of present case as the decision is relevant and applicable only for computing the deduction u/s 80HHC of the Act and not for the purpose of section 56 and 57 of the Act. He also stated that assessee has only made bald statement which is made for the first time before Tribunal that she has given funds for the purpose of business as a measure of commercial expediency as held by the Hon'ble Supreme Court in the case of CIT v. SA Builders (2007) 288 ITR 1 SC, as she is a Director in GPL while this fact has not been verified by the authorities below. 10. We have considered the rival submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to GPL of ₹ 98 lacs, the interest attributable thereof paid to SCBL shall be allowable to be set off against the interest income if the assessee is able to prove before the assessing officer that the said interest free loan of ₹ 98 lacs given to GPL has been given as a measure of commercial expediency as held by the Hon'ble Supreme Court it the case of S.A Builders (supra) and hence to that extent we allow the appeal subject to verification by the assessing officer and accordingly set aside the matter to the file of assessing officer for necessary verification as detailed above and the assessee will be given proper and adequate opportunity in accordance with the principles of natural justice. Relevant extracts from the decision of Hon'ble Supreme Court decision in S A Builders Limited (supra) are extracted below for ready reference : "16. We have considered the submissions of the respective parties. The question involved in this case is only about the allow ability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court and other authorities should have enquired as to whether the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 23. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 24. No doubt, as held in Madhav Prasad Jatia v. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(l)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court which set aside the aforesaid decision is not correct. 30. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT (1995) 215 ITR 582 (Bom) also does not appear to be correct. 31. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
