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TMI Blog2024 (3) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... is bad in law and bad on facts. 4. The ld. CIT has erred in sustaining disallowance of Rs. 4,03,033/-, on account of interest on car loan and Rs. 1,13,550/- on account of payment of motor insurance expenses u/s 57 which is bad in law and bad on facts. 5. The appellant craves liberty to add, alter, amend or vary from the above the above grounds of appeal at or before the time of hearing." 3. Brief fact of the case is that the return of income for assessment year 2017-18 was e-filed by the assessee on 30.10.2017 vide acknowledgement No. 274712301301017 at an income of Rs. 1,11,46,350/-, Thereafter, assessee revised his return of income on 07.11.2017 vide acknowledgement No.293122911071117 declaring total income at Rs.1,11,46,350/-. The case was subsequently selected for Scrutiny through CASS and the reason of selection was "Large deduction claimed u/s 57". Accordingly, notice u/s 143(2) was issued on 13.08.2018 through Income Tax Business Application (ITBA) platform and duly served on the assessee's registered e-mail. Accordingly, notices u/s 142(1) were issued to the assessee on 06.08.2019, 25.10.2019, 31.10.2019, 02.11.2019 and show cause notice on 27.11.2019 & 05.12.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion assessee claimed interest income of Rs. 67,89,633/- under the head Income From other sources and assessee has claimed interest expenditure of Rs. 62,11,788/-. As per section 57 of the Income tax act, 1961 expenditure incurred wholly and exclusively for the purpose of earning interest income shall be allowed as expenditure. In this regard assessee was asked to submit a nexus between interest bearing loans and interest earning advances. In his submission dated 15.11.2019 assessee submitted a list of loans taken and advance given along with date of loans taken and advance given. On perusal of the submission of the assessee it was noticed that the loans on which assessee is earning interest income during the year under consideration were advanced in the financial year 2004-05, 2005-06, 2006-07, 2008-09. 2011-12 2012-13, 2014-15, 2015-16 and 201617. Whereas, the loans on which interest expenditure claimed were borrowed in the financial year 2004-05, 2008-09, 2011-12, 2012-13, 2014-15, 2015-16 and 2016-17. As it was clear from the above that assessee has advanced higher amount of money in the earlier years white higher amount of money was borrowed in later year on which interest exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurance expense Rs. 1,13,550/- as expense u/s 57 of the Act. The assessee was asked to substantiate his claim and establish the nexus with the income earned under the head income from other sources and interest paid on care loan. The claim of the assessee that the same car was used for purpose of the business was never established by the assessee. Assessee in its return of income claimed it as expense under the head income from other sources while in his submission dated 06.12.2019 assessee has claimed it as expense under section 36, section 32 and section 37 but he failed to submit nexus of such expense with income from other sources and also failed to establish allow ability of such expense under the head income from business or profession. Mere change of claim by the assessee during the assessment proceedings does not establish the allow ability of expense under the head Income from Business or Profession. Again, assessee himself has agreed that above mentioned expenses has no nexus with the income earned from other sources and hence cannot be allowed. 5. Aggrieved from the above order of the ld. AO, the assessee preferred an appeal before the ld. CIT(A). Apropos to the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any nexus with the appellant's interest income under Income from Other Sources, he sent a show cause notice asking the appellant to justify the allowability of the depreciation and the latter gave a combined reply dtd. 06/12/2019 which covers other expenses, viz., interest on car loan and motor car insurances to be dealt with, in Grounds 4 and 5 respectively hereinafter. The excerpt of the said reply reads as under- Disallowance of expenses of Rs. 14,83,396/- incurred for the purpose of earning interest income under the head income from other sources. That the assessee was asked as to why the aforesaid expenses should not be disallowed these expenses are not since these expenses has no bearing on interest income and expended wholly and exclusively for the purpose of earning or making such income. The details of expenses sought to be disallowed is as under: S. No. Particulars Amount 1. Interest paid on car loan 4,30,033/- 2. Motor Insurance 1,13,550/- 3. Depreciation 9,39,813/- Total 14,83,396/- n this regard it is submitted that the aforesaid expenses have been incurred exclusively for the purpose of earning income from busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Grounds 4 and 5 Considering that expenses of interest paid on car loan (Rs 4,30,033) and insurance premia paid on the car (Rs.1,13,550) arose from one and the same asset (the motor car in question), the appellant's reply to the show cause notice dated. 27/11/2019 and his subsequent written submission were all common for claims of depreciation, interest paid on car loan and car insurance and of course, the discussions in the assessment order on all the three items were on similar lines, my decision in regard to the claim of depreciation as discussed against Ground 3 above, will hold good in respect of Grounds 4 and 5 too. Both Grounds 4 and 5, are, therefore, dismissed. Ground 6: Consequential in nature, so no separate discussion is called for. In the end, the appeal is dismissed." 6. As the assessee did not receive any favour from the appeal filed before ld. NFAC/ CIT(A). The present appeal filed against the said order of the ld. NFAC before this tribunal on the grounds as reiterated herein above. To support the grounds so raised the ld. AR appearing on behalf of the assessee has placed reliance on the written submission which is extracted herein below:- " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar transactions in which the funds are rotating depending upon the requirements and the year end balances being considered may not sometimes reflect the correct position. The theory of averages cannot be applied when exact date of all the years and calculations of interest is available on each loan account. 1.7. All the loans taken are verifiable and which had not been doubted or disputed in any of the assessment proceedings. The payment of interest payment is also not in dispute, all the parties are regular income tax assessee. Further the earning of income is also from various firms and other parties is also well accepted. The benefit is flowing not only in the form of interest but other benefits also in the form of remuneration and share of profits which the ld. AO has completely failed to appreciate. The total remuneration received from the firm during the year was Rs. 61,87,975/- and share of profits at Rs. 20,92,317/- from the firm. The investment and earning had been highly beneficial and the deduction of interest denied was absolutely without any valid basis or justification. 1.8. The interest had been received at 12% and on the similar rate the interest had been paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the loan was given by the assessee as a measure of commercial expediency. The expression "commercial expediency" is one of wide import and includes such expenditure as a prudent business-man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of the business". "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. iii. Shahibag Entrepreneurs v. Income-tax Officer 50 ITD 113 (Ahd.) / 49 TTJ 554 (Ahd.) Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 1979-80,1980-81 and 1981-82 - Assessee paid interest on loans taken by it and claimed deduction thereof - Assessing Officer made proportional disallowance/addition on ground that assessee had advanced interest-free loans to its subsidiaries and others - Whether, in absenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is no provision anywhere in the Income-tax Act to subject a person to tax in respect of hypothetical income, that is to say, an income which ought to have been earned or which the assessee had jailed to earn. Thus, the first appellate authority had erred in confirming the disallowance/ addition of proportionate interest of varying amounts for each of the years under appeal. The findings and conclusions of the assessing authority were, therefore, reversed and the additions made by him in each of the three relevant years were deleted. iv. Raj Kumar Singh & Co. v. DCIT 51 ITD 628 (All.) Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1990-91 - Assessee-firm was a sub-contractor and also earned income from hiring out tippers and dumpers - It had investment in shares also - During year under consideration it accepted interest-bearing deposits in order to repay interest-free advances received and invested in shares during 1986-87 - Amount borrowed was less than amounts paid towards old borrowings - Interest paid by it to creditors/depositors was disallowed on ground that withdrawals by partners were more than credit balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee's own funds. The idea of weighted average was all right in theory but theory could not take the place of facts. The fact of the matter was that the Assessing Officer had not given any finding on the question whether the sum of Rs. 2 lakhs came entirely from the borrowed funds of the assessee. In the circumstances, no disallowance was called of in the instant case. vi. Gujarat Narmada Valley Fertilizers v. DC.I.T 108 taxman 213 (Ahd.) (Mag.) Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on capital borrowed - Assessment year 1995-96 - Whether, where no direct nexus had been proved between interest bearing loans taken by assessee and interest free advances given to associate concerns, there was any justification to disallow part of interest claimed under section 36(1)(iii) - Held, no Held On going through the figures in the balance sheet of the assessee-company as on 1-4-1994 and 31-3-1995, it was found that the share capital and the reserves and surplus together with the accumulated depreciation would far exceed the loans and advances made to the said three concerns. The percentage of loans and advances in relation to the own funds of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free advances made to its directors. Therefore, the Assessing Officer was not justified in making disallowance of Rs. 57,885 on account of interest payable by the assessee and adding the same back to the income of the assessee. So, the Commissioner (Appeals) had rightly deleted the impugned addition. The assessee's claim of interest on borrowed capital was allowed. ix. CIT v. Hotel Savera 148 CTR (Mad) 585 Business expenditure - Interest on borrowed capital - Advance to third party without charging interest - Even after debiting the drawings and the loss, there are sufficient funds with assessee-firm to cover the entire advance - Firm paying no interest on amounts outstanding in the accounts of its partners - In absence of any material or evidence to indicate that the firm had advanced moneys out of borrowed funds, the presumption would arise that money was advanced out of his its funds - Finding of the Tribunal that no disallowance is called for is a finding of fact - Same sustainable in law - Finding of AAC that the advance would have come proportionately out of own funds as well as borrowed funds is not based on any principle of law. x. United Agencies v. ITO 37 TTJ (Ah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is covered by its business assets in the form of sundry debtors and stock on hand - Therefore, AO was not justified in disallowing part of the interest paid by assessee on its overdraft account. Conclusion : No part of interest paid by assessee on its overdraft account could be disallowed on the ground that assessee had made interest-free advances to its sister concern by issuing cheques from its cash credit account when it has sufficient interest-free funds available to match the interest-free advances. xii. Smt. Tara Devi v. ITO 68 TTJ (Jd) 361 Business expenditure - Interest on borrowed capital - Interest-free loan given to husband - Most of the interest-bearing loans were taken by assessee in prior years and interest on such loans had been allowed as deduction in earlier years - This fact clearly proves absence of any nexus between the funds borrowed on interest and interest free advances given by assessee to her husband - Even otherwise, assessee's own capital was substantially more than the interest-free loan - Disallowance made out of interest expenditure not justified. It is therefore prayed that the addition made by the ld. AO may kindly be del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 408 (Guj) "10. It is from that point of view that we have to approach the question that has been referred to us in the instant case. Under clause 7 of the deed of partnership, the assessee was one of the two managing partners of the firm of M/s. Dhirajlal Khushaldas & Bros. That partnership firm was the managing agency firm of limited company and was managing the affairs of that company. The amount which has been claimed by the assessee is found to have been incurred by the assessee in connection with the business of the firm and it is further clear that the income which the assessee gets by way of share in the profits of the partnership firm is chargeable under the head "business" under section 28 of the 1961 Act, similar to section 10(1) of the 1922 Act. Thus, it is against his income under the head "business" that the assessee claims deduction by way of expenses in connection with the motor-car, the having been used for the purpose of business of the partnership firm in question. It is clear to our mind that in the light of the facts and circumstances, which we have just now set out, the assessee had incurred this particular expenditure wholly and exclusively for the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefrom in determining taxable income of the partners.Taking into consideration the general proposition of law laid down by the Supreme Court, Gujarat High Court and the Patna High Court that the partner if he expends an amount in earning the share of profit from a firm, he can on showing its actual expenditure be allowed a deduction from the total income, the case of the assessee is to be examined. The authorities below have not bifurcated the amount of Rs. 12,000 as to the expenditure on petrol and the depreciation on car. However, it is common ground that the car was new and was purchased during the previous year relevant to the asst. yr. under appeal. It was clarified at the bar by the Learned Counsel for the assessee and by the assessee who was present in the court that the total expenditure on petrol was Rs. 3,500 and he claimed Rs. 2,000 only as relating to the business activities of the firm from which he earned the profit. Applying the above laid down principles by the Hon'ble Courts, it is held that the expenditure of Rs. 2,000 incurred by the assessee was an expenditure wholly and exclusively laid out for carrying on the business and earning business income. The share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has invested the amount in firm and has also given the advances on interest. The ld. AO on the one hand accept that the use of the car is for the purpose of business and on the other hand disallowed the related claim of the expenditure which is contradictory. He relied the following observations of the AO Further in his own reply vide para 4 assessee accepted that this asset was used specifically for business purpose but also failed to substantiate his claim regarding usage of such motor car in his business. Based on the above submission the ld. AR prayed that merely the claim is in other source the same cannot be disallowed once he has accepted the fact that the car is used for the purpose of the business. 8. Per contra, the ld. DR heavily relied upon the finding recorded in the lower authorities and submitted that the assessee has wrongly offered the interest income and also claimed the other expenses without providing the nexus of the payment and receipt. As regards the disallowance of depreciation on car, interest on car loan and insurance he has relied upon the orders of the lower authority. 9. We have heard the rival contentions and perused material availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest paid was Rs. 62,11,788/-. The interest received from firm was also included in the interest received. The ld. AO observed that the interest from firm is taxable as business income and therefore the same needs to be taken as business income. It is submitted that whether the same is considered as business income or income from other sources, the deduction of interest was allowable against such interest income and other income received from the firm. Besides interest income, the assessee had also derived remuneration and share of profits from these firms, which the ld. AO has not considered. The investment in the firm had benefitted the appellant to earn income against which the expenditure was being incurred. The ld. AO has had a futile exercise in implementing his own judgment over the business decisions taken by the assessee in making his investment in the various firms and giving loans and advances. The ld. AO had made a fatal error in considering only the new loans and interest relatable only to these borrowings were allowed. The old borrowings on which interest was being paid was not considered. Further in these accounts there are regular transactions in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter the claim of Rs. 52,51,681/- cannot be denied to the assessee and in terms of these observations, the ground No. 2 raised by the assessee is allowed. 10. As regards the Ground No. 3, the ld. AO noted that the assessee has used the car and claimed the relevant expenditure against the other sources on the genuine use of the motor car and payment of insurance and car loan interest which is put to use by the assessee for the business purposes wherein the assessee has already offered the income of the interest and remuneration earned from the various firms the deduction on account of claim of depreciation and interest on car loan and insurance for an amount of Rs. 14,83,936/- cannot be denied to the assessee. In support of the contention so raised the ld. AR of the assessee relied upon the decision of the Co-ordinate Bench in the case of Sunil Kumar Kanhayalal Doshi vs. ACIT in ITA No. 53/Jodh/2020 dated 21/12/2020 wherein it has held as under:- "5. After careful consideration of the matter we find that the fact that the expenditure was being incurred is not in dispute. In relation to the deprecation on one car and scooter, the CIT(A) is trying to judge from the angle as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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