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TMI Blog2005 (3) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby disallowing the same under section 36(iii) of the Income-tax Act. It is worth mentioning that Ground No. 1 is general in nature so not to be adjudged independently and Ground Nos. 2 3 are inter-connected hence hereby decided in a consolidated manner. 2. During the course of assessment proceedings it was noticed by Assessing Officer that for the assessment year under consideration i.e. assessment year 1998-99 the interest received amounted to ₹ 7,83,041 and the interest paid amounted to ₹ 24,03,418. In respect of interest received the Assessing Officer has asked as to why the same should not be taxed as income from Other Sources . In compliance the explanation of the assessee was that nature of business is providing business centre, money lending and investment in shares. It was also stated that the assessee engaged in the business of Yarn Dyes, Colours, Chemicals and also dealing in Import Licence etc. Regarding main query of the interest received, it was explained that the assessee firm had taken loan from time to time from number of parties and also advanced loan, time to time, to number of parties. It was stated that the said activity had been done sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT [2000] 72 ITD 1 (Mum.). However, Assessing Officer was not convinced after examining the position of loan advanced and the utilization of funds of past few years. He has arrived at the conclusion that interest bearing fresh loan was not utilized for advancing loan to earn interest. According to him the dates of loan received did not coincide with the loan advanced. In this regard he has also reproduced copy of account of M/s. Mayuresh Construction Company. With the result disallowance of interest paid was made and held the same was not allowable under section 36(1)(iii). 6. This issue was carried to the first appellate authority who has confirmed the disallowance firstly on the ground that the appellant was not in a position to bifurcate position of funds said to have been utilized for lending on interest on the ground that the funds were inter-mixed. Further he has also confirmed the disallowance on the ground that the interest bearing funds were utilized towards investment in shares. Conclusion drawn by ld. CIT(A) is reproduced below: It may be noted that aggregate sum of interest bearing funds of ₹ 2,11,23,767 is inclusive of interest accrued as on 31-3-1998 as n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The next ground is in respect of taxing the interest received of ₹ 7,83,041. This was done by the Assessing Officer on the ground that the loans were given out of interest refunds, hence not to be adjusted against the interest paid. In compliance of several queries raised by the Assessing Officer the explanation offered from the side of the assessee was that taking of loans and investment made in the shares as well as advancing of loans was the business activity of the assessee since past number of years. In this regard from pages 11 to 19 copies of relevant bank statements were placed on record showing sources of loan advanced to three parties from whom the interest was received. The compilation also consisted several statements showing interest paid and interest received pertaining to assessment years 1995-96 to 1999-2000. The compilation also consisted a copy of the written submission filed before the ld. CIT(A) and few paras of this letter are worth reproduction. 5. Accordingly, we submit that the appellant firm has been doing the business of investment in shares since last number of years. The said shares are purchased from time to time and also sold from time to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s very difficult to bifurcate the funds particularly being used for a particular purpose because the funds were utilized out of a common kitty formed of several sources. It is mentioned that the appellant firm was always having interest bearing funds and the amount given to Mayuresh Construction Company was out of loans taken from M/s. Ramgopal Textiles Ltd. In this regard certain copies of accounts and Bank Statements have also been produced. It has also been contested that the Assessing Officer has wrongly observed that the loan received from Mayuresh Construction Company of ₹ 50.00 lakhs have been given to the three parties from whom interest is received. It was categorically stated that this was the wrong observation of the Assessing Officer. On the basis of the compilation filed and relying upon pages 11 to 19 it was explained that only ₹ 40 lakhs was given out of the amount received from M/s. Mayuresh Construction Co. and ₹ 30 lakhs was given out of the money received from M/s. Ramgopal Textiles Ltd. 9. The contentions of the appellant appears to be correct and the question whether interest bearing funds are utilized for advancing loan from whom interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious business transactions during the financial year such as selling its investment, utilization of the opening cash and bank balances, procuring unsecured loans and utilization for the said fund for its business purpose. Thus all the three conditions for claiming deduction under 36(1)(iii) are fulfilled. The money has been borrowed by the assessee; it has been borrowed by the assessee for its business and the assessee has also paid interest on the amount so borrowed. Therefore, the claim made by the assessee of the payment of interest of ₹ 1,74,12,682 is allowable under the provisions of section 36(1)(iii) of the Act. This expenditure is even otherwise allowable under the provisions of section 37(1) of the Act because the same has been incurred for the purpose of the business of the assessee. It has been held by various courts that in order to sustain the claim for deduction by way of business expenditure, the expenditure must have been incurred for the purpose of the business, which was in existence in the year of account, the profits of which are under assessment. If during the relevant period there was, in fact, no business, no question of computation of its income after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 900. Thus in both the cases the shareholder is getting the net income of ₹ 900 after the deduction of tax whether the tax is deducted in the hands of the shareholder or in the hands of the company. Under the circumstances it cannot be said that the dividend income received by the share holder is exempt. The only difference, which has been made by the provisions of section 115-O is that the incidence of tax is shifted from the shareholder to the company. We, therefore, find force in the arguments of the learned counsel that the dividend income received by the assessee is in fact not exempted from tax but the incidence of tax has been shifted from the shareholder to the company. Ultimately it is the income of the shareholder, which is being assessed either in his own hands or in the hands of the company. The contention of the department that the dividend income is exempted from tax and, therefore, no expenditure can be allowed against that income is without any substance. On the basis of certain case laws cited herein above as well as order of the Co-ordinate Bench it is evident that the facts of the case clearly revealed that the assessee company has borrowed money ..... X X X X Extracts X X X X X X X X Extracts X X X X
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