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TMI Blog2017 (8) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above titled appeal and the two cross-appeals have been preferred against the orders dated January 11, 2013 and September 19, 2015 of the Commissioner of Income-tax (Appeals) (hereinafter referred to as the CIT(A) )-2 Mumbai relevant to the assessment years 2009-10 and 2005-06 respectively. 2. Now we will deal with I. T. A. No. 4852/M/2015 which is the Department's appeal for the assessment year 2005-06. 3. The Revenue has taken the following grounds of appeal : On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals)) has 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. 2. On the facts and in the circumstances of the and in law, the Commissioner of Income-tax (Appeals) has erred in deleting the additions made by the Assessing Officer on account of financial expenses amounting to ₹ 2,94,754 out of the total expenses claimed amounting to ₹ 25,33,850 under the head 'financial expenses'. 3. The appellant prays that the order of the Commissioner of Income-tax (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited company, which directly or indirectly owned the flat or the building, the loan for acquisition of such property is secured by pledge of the debenture and classified as housing loan. Therefore, the above loan obtained by the assessee was regarded as housing loan. The assessee has submitted that the assessee has purchased the debenture out of the loan secured by the house. The assessee availed of this loan for purchase of the said debenture with full knowledge and acquaintance of HDFC Ltd. The Assessing Officer was of a view that the loan taken by the assessee is a housing loan and no deduction can be provided to the assessee in any provisions of said Chapter 4. The assessee has claimed the deduction under section 57 of the Act which can be allowed, if any other expenditure not being capital in nature laid out or expediently fully and exclusively for the purpose of making or earning such income. The loan was taken from HDFC Ltd. is not used for housing and the same was used for purchase of debentures. Therefore, the assessee has contended that the assessee has got the huge money of interest out of which 10 per cent. is applied in debentures and the assessee had indirect owners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the amount received from Nishit Desai of ₹ 3,45,65,400 in Makrupa Chemicals Pvt. Ltd. The said amount was received on account of debenture for which the Nishit Desai claimed that he has taken loan from HDFC Ltd. Similarly TV Zine India.com Pvt. Ltd. was also incorporated on September 13, 2000 and that company is also incurring losses. The Assessing Officer has also verified the profit and loss account of the said company and the address of the company is 94B, Mittal Court, Nariman Point, Mumbai. But the said premises is owned by Nishit Desai. Therefore, the Assessing Officer was of the view that both these companies had never done any business and there was no intention to do the business at all. The assessee was fully aware about the financial position of this company and he was also aware that the company was just paper company. In spite of this fact the assessee has purchased the debenture of both these companies by borrowing funds from the bank. The debentures are unsecured and carry interest at a negligible rate of 0.05 per cent. Though the debentures have been issued by the two companies actually the entire funds have found their way into the company Makrupa Chemicals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure under section 57(iii) and, therefore, if in a particular assessment year there was no income, the expenditure would not be deductible under that section. The Revenue relied strongly on the language of section 37(1) and, contrasting the phraseology employed in section 57(iii) with that in section 37(1), pointed out that the Legislature had deliberately used words of narrower import in granting the deduction under section 57(iii). Section 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession computing the income chargeable under the head Profits and gains of business or profession . The language used in section 37(1) was laid out of expended-for the purpose of the business or profession and not laid out or expended-for the purpose of making or earning such income as set out in section 57(iii). The words in section 57(iii) being narrower, contended the Revenue, they cannot be given the same wide meaning as the words in section 37(1) and hence no deduction of expenditure could be claimed under section 57(iii) unless it was productive of income in the assessment year in question. The content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the Legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil ; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of section 57(iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out or expended wholly and exclusively for the purpose of making or earning such income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not say that the expenditure shall be deductible only if 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. This is exactly the case of the appellant and hence in view of this Supreme Court decision, the appellant is entitled for deduction of interest under section 57(iii) of the Act. 9.12 In another case of CIT v. New Savan Sugar and Gur Refining Co. Ltd. [1990] 185 ITR 564 (Cal) the question was as to 'whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on amount borrowed, there was no infirmity in the directions of the Commissioner (Appeals) that against the interest income of ₹ 6,92,000, ₹ 6,14,992 should be allowed as expenditure and, hence, the net taxable income under other sources will be ₹ 77,008 only. Hence, there was direct nexus between the amount advanced and amount borrowed and, hence, the order of the Commissioner (Appeals) was to be affirmed.' 9.14 The above decision is directly in favour of the appellant as the issue involved in the above case is exactly identical to the issue involved in the case of the appellant. 9.15 It may be noted that in the assessment year 2009-10, my learned predecessor has not agreed with the contentions of the appellant and has upheld the order of the Assessing Officer disallowing the claim of deduction of interest under consideration. With due respect and regard, I do not agree with the view of my learned predecessor. It is seen from the said appellate order that my learned predecessor has not formed an independent view and has only reiterated the findings of the Assessing Officer including the aspect of 'lifting of veil'. Such an issue of 'lift ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, the more important consideration was that the appellant was entitled to recover at least the amount equivalent to what was borrowed from HDFC. If this was not done, the appellant may have lost all the money by subscribing to shares and he would have been less secure and would have been forced to pay the money borrowed from HDFC. Therefore, this was a prudent commercial decision on the part of the appellant to invest in debentures, more so from the point of view of liability management. 9.17 It is also not the allegation of the Assessing Officer that the transaction was not done at arm's length. When the debentures were issued, the interest rates prevailing in the market were very low. However, the debenture holder i.e. the appellant was entitled to a higher rate of interest in the event the company makes good profit. Now, Makrupa has actually turned around and has made brisk business over the last 2 years through the franchisee store. The appellant contends that depending on the success of this, more stores may come up. Thus, there is a significant upside to investing in debentures purely in terms of income generation and also to secure the investment. 9.18 The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), the hon'ble Gujarat High Court has observed as under (page 850) : 'The court (i.e. the Supreme Court in the case of McDowell nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act ; an inference which unfortunately in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case [1985] 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which led to McDowell's decision leaves us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partments. The assessee has made of huge money to repay the interest-free deposit taken from UBS AG and also to pay for consideration for the purpose of purchase of shares of M/s. Makrupa Chemicals Pvt. Ltd. by the company M/s. TV Zine India.com Pvt. Ltd. The subscription agreement clearly says that money of PCCUD will be used for repayment of interest-free deposit taken from the UBS Warburg. The assessee has passed on ₹ 3,45,70,000 to M/s. TV Zine India.com Pvt. Ltd. through instrument of PCCUD. The assessee had subscribed ₹ 3,45,70,000 (3450 PCCUD of ₹ 10,000 each) in the TV Zine India.com Pvt. Ltd. The subscription agreement (paragraph 3) clearly says that money will be used by TV Zine India.com Pvt. Ltd. for purchasing the shares of Makrupa Chemicals Pvt. Ltd. Therefore, the assessee has taken loan only to purchase flat No. 51, NCPA apartment by acquiring company M/s. Makrupa Chemicals Pvt. Ltd. and also to clear the interest- free deposit taken by M/s. Makrupa Chemicals Pvt. Ltd. from UBS Warburg while letting out the property by Makrupa Chemicals Pvt. Ltd. The assessee and his wife have borrowed the money from HDFC for the purpose of purchasing the property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and M/s. TV Zine India.com Pvt. Ltd. It is a conscious decision and commercial decision by the assessee to invest in the said debentures. The said debentures are convertible into shares in respect of company. Whenever housing finance is provided by HDFC to borrowers, the borrowers generally produce the shares and debentures of the co-operative society or a company as the case may be which directly or indirectly enhance the flat or building. Therefore, such loan has been classified as housing loan by HDFC according to their policy. The said loan is secured by original debenture issued by M/s. Makrupa Chemicals Pvt. Ltd. and M/s. TV Zine India.com Pvt. Ltd. The original document was held by M/s. Makrupa Chemicals Pvt. Ltd. in respect of flat No. 51, NCPA Apartment. The original share certificate issued by Apsara Co-operative Housing Society Ltd. to M/s. Makrupa Chemicals Pvt. Ltd. and 12 documents were executed at the time of taking the loan and investment in debentures. Therefore, HDFC was fully aware that the loan guaranteed by them was being directly invested in the said debentures. As per section 57 of the Act certain deductions are to be made in computing the income chargeable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the deduction of interest paid to HDFC Ltd. under section 57 of the Act has been consistently accepted by the Department from the assessment year 2003-04 to the assessment year 2008-09 in scrutiny assessment completed under section 143(3) by the Additional Commissioner/Assistant Commissioner and it was also accepted in the assessment year 2005-06 by the learned Commissioner of Income-tax (Appeals). The learned authorised representative relied upon the decision of CIT v. Naishadh Cachharajani wherein the hon'ble Bombay High Court has held that the principles of consistency and reasonable expectation on the same set of facts in law on the subject a different view cannot be taken. The Assessing Officer could not take the different view in subsequent year and the learned authorised representative relied upon the decision of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). He also relied upon the decision of CIT v. Navsara Sagar [1990] 185 ITR 564 (Cal) and the learned authorised representative also relied upon the decision relied by the learned Commissioner of Income-tax (Appeals) for the assessment year 2005-06 in the case of Tuticorin Alkali Chemicals and Fertilizer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f making or earning such income. The argument of the revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income. The making or earning of income, said the revenue, was a sine qua non to the admissibility of the expenditure under section 57(iii) and, therefore, if in a particular assessment year there was no income, the expenditure would not be deductible under that section. The revenue relied strongly on the language of section 37(1) and, contrasting the phraseology employed in section 57(iii) with that in section 37(1), pointed out that the Legislature had deliberately used the words of narrower import in granting the deduction under section 57(iii). Section 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head 'Prof its or gains of business or profession'. The language used in section 37(1) was 'laid out or expended-for the purpose of the business or profession' and not laid out or expended-for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. It would not be appropriate to allow the position to be changed in the subsequent year. Moreover, it is also held by the hon'ble Supreme Court that in the absence of any material change justifying the Revenue to take a different view of the matter, if there was no change, there is no reason to take a different view in a subsequent year. The hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC) has categorically held as under (headnote) : Strictly speaking, res judicata does not apply to Income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through different assessment years has been fond as a fact one way or the other and parties have allowed that position to be sustained by no challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. The same view has been taken by the hon'ble Delhi High Court in CIT v. Neo Poly Pack (P) Ltd. [2000] 245 ITR 492 (Delhi). Respectfully following the decision of the hon'ble Supreme Court in the case of Radhasoami Sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val contentions of both the parties. The Assessing Officer has disallowed the financial expenses of ₹ 2,94,754 being interest on working capital loan on the ground that the assessee has given interest-free advance of ₹ 51,35,817 to his related concern. We find that the assessee has produced the balance-sheet of March 31, 2004 and submitted that the assessee was having sufficient interest-free funds lying in his account, therefore disallowance of interest-free advance does not arise. The assessee has given the loans to the party on which no interest has been charged but the assessee was having sufficient interest-free funds, 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 and Power Ltd. [2009] 178 Taxman 135 (Bom) ; [2009] 313 ITR 340 (Bom). In the said judgment the jurisdictional High Court has 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 establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s non-business expenditure. 16. The matter carried to the learned Commissioner of Income-tax (Appeals) and the learned Commissioner of Income-tax (Appeals) has dismissed the appeal of the assessee. 17. The learned authorised representative submitted that this car was gifted to Shefali Garodia, ex employee. Mrs. Shefali Garodia had worked in the Nishith Desai Associates for about 14 years and left the firm with effect from August 16, 2008 and all her contractual obligations were also discharged on the same day by the firm. She was gifted a Honda Civic car by delivering the same on second and third week of September 2008. This car was gifted for creating goodwill and good feel about the firm as an own organisation and the organisation treats his employee with respect, dignity, love and affection. There was no contractual obligation exist. But the learned Commissioner of Income-tax (Appeals) has not considered that this car was given for maintaining goodwill of the firm. Therefore, it may be allowed. 18. On the other hand, the learned Departmental representative relied upon the order of the Revenue authorities. 19. We have heard the rival contentions of both the parties. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amed Indian Life and Landscape by Western Artists. The assessee was provided 100 copies of the said book which have been used by the assessee for presenting to the foreign and Indian potential clients, delegates coming from overseas and visiting India to make presentation such as business law and international taxation. Therefore, this expenditure is incurred for enhancing the professional activity and the assessee-firm has achieved specialisation and professional activity has been grown therefore it may be allowed. The learned authorised representative submitted that ₹ 12,35,250 has been paid to international fiscal association. This association is for international taxation association comprises of tax professional all over the world. Therefore, it enhances the knowledge in the field of international taxation. Therefore, it may be allowed as professional expenditure. 23. On the other hand, the learned Departmental representative relied upon the order of the Assessing Officer and the Commissioner (Appeals). 24. We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, we find that the assessee had made payment to Chatr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Departmental representative submitted that the assessee before the learned Commissioner of Income-tax (Appeals) had already admitted that he was not pressing this ground before the learned Commissioner of Income-tax (Appeals) in the earlier years, therefore this ground may be dismissed. 29. Having heard both the parties, looking to the facts and circumstances of the case, we find that the assessee himself has not pressed this ground. Therefore, the appeal of the assessee is dismissed as the assessee had conceded before the learned Commissioner of Income-tax (Appeals). Therefore, we dismiss all these grounds of appeal. I. T. A. No. 2562/Mum/2013 for the assessment year 2009-10 Ground No. 1 30. The Assessing Officer has observed that the assessee has paid salary of ₹ 4,80,000 to his son Mr. Suril Desai. The Assessing Officer has given show-cause notice to the assessee and in reply to the show-cause notice, the assessee has taken the contention that salary of ₹ 40,000 per month paid to Suril Desai who is qualified of bachelor of science in management and the salary of ₹ 40,000 per month is commensurate with his qualification and experience. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o produce the bills and vouchers for business promotion expenses. The Assessing Officer was of a view that the business promotion expenses were containing mainly hotel expenditure and gift of ₹ 5 lakhs to Chatrapati Shivaji Maharaj Vasthu Sangrahalaya and gift of ₹ 3,410 and ₹ 49,194 to Fariyas Hotel. The Assessing Officer was of a view that this expenditure is not wholly and exclusively for the purpose of business, therefore he disallowed ₹ 1 crore from the said expenses. Matter carried to the learned Commissioner of Income-tax (Appeals) and the learned Commissioner of Income-tax (Appeals) has verified the claim and disallowed only ₹ 27,35,250 out of ₹ 1 crore by observing as under : 8.11. I have gone through the details with regard to the other expenses. I am of the view that the hotel expenses are met out for the business purposes and hence, no disallowance needs to be made. Similarly, the gift expenses are the normal business expenses in the nature of the business carried on by the appellant. In view of this, I hold that the gift expenses also should be allowed as a deduction. 8.12. Out of the sponsor ship expenses, I am of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant. The Assessing Officer has no material evidence to show that the appellant has not used these premises for his business purposes. The appellant has stated that due to shortage of space, the appellant is also using the premises of Prantik Strategic Securities Advisors P. Ltd. The appellant has stated that the appellant has not paid any other compensation but meeting out the electricity expenses of the premises for the premises being used by the appellant for his business purpose. I find that there is nothing on record to show that the premises are not used by the appellant for his business purposes. In view of this, the appellant's submissions are accepted and I hold that the electricity expenses are met out for the business purposes of the appellant and it should be allowed as deduction. The Assessing Officer is directed to delete the addition. 36. We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consultancy Pvt. Ltd. 1,02,946 Financial year 2008-09 Eastern Energy and Mines (India) Pvt. Ltd. 8,400 31-3-2007 Sedef Trustee Company Pvt. Ltd. 1,200 31-3-2007 2,82,05,555 14,8. The Assessing Officer had disallowed the amount of ₹ 22,53,000 observing that the appellant was not able to explain with respect to fund flow statement, how the appellant has given interest- free loan from capital. In this connection, the appellant stated that it is the balance-sheet as at the end of the relevant year that is to be considered and not the relevant point of time when these advances are given for the purpose of making disallowance as held by the Bombay High Court in the case of Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 178 Taxman 235. 14.9. As regards the running account with Makrupa Chemicals Private Limited, TVZinelndia.com Private Limited, Prantik Strategic Advisors Pvt. Ltd. and Swiftlndialnc Corporate Services Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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