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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 ..... the interest income and claimed the interest payment which is not exceeding the interest received and therefore, even in the assessment order, we find that the interest payment is not disputed by the ld. AO and he has also accepted that assessee has given the loan and advanced as made the investments form various parties. Considering that the aspect of the matter the claim cannot be denied to the assessee and in terms of these observations, the ground No. 2 raised by the assessee is allowed. Disallowance of other expenses, including depreciation claimed on a car, interest paid on a car loan, and car insurance - HELD THAT:- On being consistent to the findings so recorded and considering the fact that assessee is a partner in four firms and the use of that car for the purpose of the business cannot be denied in the absence of the any adverse finding for the use of the car and the consequential depreciation, interest and insurance cannot be denied thus based on these aspect of the matter ground Nos. 3 and 4 raised by the assessee is allowed. - DR. S. SEETHALAKSHMI, JJUDICIAL MEMBER AND SHRI RATHOD KAMLESH JAYANTBHAI, ACCOUNTANT MEMBER For the Appellant : Sh. Amit Kothari, C.A. For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co., M/s Balaji Enterprises, M/s Jagdamba Export and M/s Jagdamba Enterprises. The assessee s main sources of income are salary, share of profit from partnership firms and income from trading of shares. During the course of assessment proceedings in order to verify the deduction claimed u/s 57 various relevant documents were called for an examined. In the year under consideration on the perusal of documents submitted regarding the income from other sources. During the assessment proceedings assessee was asked to explain the nexus of deductions claimed with the income earned under the head income from other source along with documentary evidences. In the instant case on the perusal of documents submitted regarding the income from other sources, it was observed that assessee claimed interest income from parties of Rs. 66,83,393/-. In this connection assessee was asked to explain the parties from whom such interest income was received. Assessee submitted its reply vide letter dated 15.11.2019 in which assessee claimed that out of total interest income of Rs. 67,89,633/- he has received interest from his four partnership firms which is as follows:- 1. Balaji Enterprises Rs. 7,84,825/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on 27.11.2019 and 05.12.2019. In response to the show cause notice assessee submitted its reply on 07.12.2019. The reply of the assessee is not acceptable as section 57 of the Income Tax Act, 1961 clearly states allow-ability of expenditure only when it is incurred wholly and exclusively for the purpose of earning such income and in this case assessee himself through his submission proved that there is no nexus between interest earning advance and interest bearing loans. Further assessee is claiming that the same loan for which interest expenditure is claimed was used for advancing the loan to partnership firm. This contention of the assessee is also not acceptable because the interest bearing loan on which interest was paid was taken many years after in which loan was advanced to partnership firm expense of assessee work out Rs. 9,60,107/-. The assessee has claimed depreciation of Rs. 9,39,813/- 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. Thus, out of interest paid of Rs. 62,11,788/- only Rs. 9,60,107/- was considered as allowable and rest of the claim of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;Income from other source, the appellant's logic is the allocation of interest against investment in the business firms and other advances given, could not be precisely done by him which was why the interest income in full was shown under Income from other sources and the deduction on interest paid, was, accordingly claimed against this interest. The appellant's detailed submission has been gone through carefully. Irrespective of what the principles say, what is most material is to show the expenditure actually being incurred. The plethora of court cases relied upon mostly differ from the appellant's case fact- wise. None of the decisions has discounted the importance of 'nexus', so vital for the claim of the deduction. In respect of the present case, the appellant has at any time not been able to give any evidence to back its claim as regards the allowability of the interest paid to the the tune of Rs.62,11,788. The AO gave a succinct picture of how much to allow and how much not to, out of that interest (paid) amount in the table in para 7.4, followed by analytical discussion on each row of the table. Clearly, the appellant had neither any evidence-based coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing depreciation, have been incurred exclusively for the purpose of earning the income from business as well as other sources. This contention of the appellant along with the simultaneous mention of all the above 3(three) sections, is confusing and does no good to his claim for the deduction of all the three items, depreciation included. In the written submission during the appeal proceedings (already reproduced above), the appellant submitted that he used his personal resources and assets for the benefit of the firm and to that extent the depreciation deserves to be allowed against his business income. The appellant referred to a plethora of court cases, notably the Hon'ble Apex Court decision in CIT vs Ramniklal Kothari [74 ITR 57] which appears to have laid down a general proposition that the business carried on by a firm is business carried on by partners and so, as held in Ram Murli Sood vs ITO (1982) 14 TTJ (CHD) 352, the share of profit from the partnership firms constituted business income in the partner's hands from which the expenditure incurred actually for earning the income can be claimed. From the appellant's submission as above, it is not difficult to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalal Rakesh Kumar Co, M/s Balaji Enterprises, M/s Jagdamba Exports, and M/s Jagdamba Enterprises. 1.2. The remuneration received from the various firms in which the appellant is a partner was shown as business income, while the interest income received form these firms was disclosed as income from other sources including various other interest income earned by the appellant. 1.3. The interest paid was also claimed as deduction against the interest income shown by the appellant which had been not been partly allowed by the ld. A.O. 1.4. The perusal of the assessee order would revel that that the appellant had received interest income of Rs. 67,89,633/- against which the interest paid was Rs. 62,11,788/-. The interest received from firm was also included in the interest received. 1.5. 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 appellant had also derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such investment has to be allowed as deduction against such income. Out of the total interest paid at Rs. 62,11,788/- deduction of only interest paid at Rs. 9,60,107/- has been allowed and balance Rs. 52,51,681/- has been disallowed. 1.10. There is no observation that the interest bearing funds had been diverted into any interest free advances or other investment which is yielding any non taxable income. The disallowance of interest was therefore without any legal basis and is contrary to the facts existing on records. 1.11. The disallowance of actual and real expenditure incurred cannot be made and tax can be levied only on the real income which the assessee has really earned. Tax cannot be levied on such notional income by disallowing actual expenditure incurred. The entire borrowings which had been made by the assessee had been used for the purpose of business and therefore the interest on such borrowings also cannot be disallowed. 1.12. Your kind attention is also invited towards the following judgments which also supports the contention of the assessee that under these facts no addition can be made. i. Munjal Sales Corporation V/s CIT (2008) 298 ITR 298 (SC) at page 305 The op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach of the three years and did not charge any interest from those parties for the loans and advances given by it. However, the Assessing Officer had not established by cogent evidence that the borrowed funds were utilised, diverted or given away to its subsidiary companies and other parties. There was no nexus established by the Assessing Officer between the loans obtained and loans given to its subsidiary companies and others. This vital fact had been ignored and lost sight of by the first appellate authority in deciding the controversy before him. In the absence of any finding or evidence, the disallowance of proportionate interest by the Assessing officer could not be upheld. Besides, it was also not the case of the Assessing Officer that the assessee- company had charged or earned income from its subsidiary companies and others but had not accounted for it in its accounts. The finding of the assessing Officer in all these years was that the assessee-company had not charged interest on receivables from its subsidiary companies and others. It was neither the case nor the finding of the Assessing Officer that the assessee had bargained for interest or had collected interest on suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and that partners had no right to withdraw amount from capital account - Whether, where borrowals in year in question were less than amounts repaid towards old borrowals, it could be said that borrowals were not for business purposes - Held, no - Whether, when shares had been received in exchange of old shares on amalgamation of company and shares were revalued, difference between original cost and actual cost could be credited in accounts of partners which could be utilised by partners as they wished - Held, yes - Whether in totality of circumstances and facts of case withdrawals by partners were less than credit balance and borrowal by firm was for business purpose and, therefore, no part of interest paid could be disallowed - Held, yes v.Sarvaraya Textiles Ltd. v. DCIT 54 ITD 612 (Hyd.) Section 37(1) of the Income-tax Act 1961- Business expenditure- Allowable as - Assessment year 1990-91 -Assessee gave interest-free advance to a firm whose computer time it was purchasing on payment of rentals- Said firm refunded said advance after a delay of two years- In absence of proper explanation by assessee, Assessing Officer disallowed interest thereon on ground that said amount came o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the interest free advances given. Hence, the Assessing Officer had to be directed to delete the addition. vii. Oswal Industries v. ACIT 109 Taxman 279 (Mum.) (Mag.) Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 1990-91 and 1991-92 - Whether non-charging of interest on loans given by assessee could not be ground for disallowing interest paid by assessee on loans taken by it, in absence of any nexus having been brought on record - Held, yes Held The Assessing Officer had not brought on record any nexus between the interest-bearing loans taken by the assessee and the interest-free advance given by it. Non-charging of interest on the loans given by the assessee was not a ground for disallowing the interest paid by the assessee on the loans taken by it in the absence of any nexus having been brought on record. The disallowance was, accordingly, deleted viii. A.C.I.T v. Shivalik Loha Mills (P.) Ltd. 123 taxman 276 (Chd.)(Mag.) Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1989-90 - Assessing Officer disallowed interest paid by assessee on loan because certain amounts were taken by dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan borrowed from the bank and the interest-free amounts advanced to sister concern - The loan from the bank on the security of the hypothecation of goods was borrowed for the business purposes of the assessee-firm Once it is established that the capital was borrowed for the purpose of business, it is immaterials as to how that borrowed capital was applied Moreover, the interest-free funds and the current profit of the assessee were substantially more than the amount of interest-free loan advanced to sister concern ITO is, therefore, directed to allow the entire amount of interest paid to the bank ADDL. CIT Vs. LAXMI AGENTS P. LTD. (1980) 125 ITR 227 (Guj) applied. SUMAN NANGIA Vs. ITO (1990) 36 TTJ (Del) 177 distingushed. xi. Ashok Brothers v. ITO 76 TTJ (Hyd) 427 Business expenditure Interest on borrowed capital Interest-free advances to sister concern Disallowance can be made by the Department only when nexus is proved between the amounts borrowed and the amounts advanced When there are sufficient funds available with the assessee on which no interest was paid, then diversion of such funds by way of interest-fee loans to sister-concern does not allow disallowance of inters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived from the firm is also taxable in the hands of the partner and had been duly included in the income of the firm. Even in relation to the share of income received from firm, which is taxable as business income, and that the profit share from the firm does not qualify as income not chargeable to tax since the same has already suffered tax in the hands of the firm. As said under Section 10(2A) of the I-T Act, the tax on profits have already been paid and so the same is exempt from tax in the hands of the partners. 2.4. It is respectfully submitted that the appellant had used his personal resources and assets for the benefit of the firm and had derived income the purpose of the business of the firm. Thus, the claim of depreciation deserves to be allowed against the business income. 2.5. It is further submitted that while under the Indian Partnership Act, the firm and its partners are synonymous. The firm is nothing but the collective name of the partners under the Partnership Act, as far as the I-T Act is concerned, it is an entity distinct and separate from its partners. So, while the remuneration and interest earned by partners from the firm is taxable in the hands of the partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome by partner of firm Receipt of share income by partner is business income for purpose of section 10(1) of 1922 Act Expenditure by way of salary and bonus to staff, maintenance of car and travelling expenses for the purpose of earning such income, therefore allowable as business expenditure. b. RAM MURTI SOOD vs. ITO (1982) 14 TTJ (CHD) 352 Business Expenditure Allowability of deduction Personal car used by assessee partner for business of firm Assessee was entitled to allowance of such expenditure and depreciation or car against share income from said firm Held: The Learned Counsel for the assessee submitted that in this case also, the assessee has share income from three firms and has no independent business of his own. It was contended that factually he was travelling between Sirhind and Sadhugarh for purposes of the business of the firm and was also going to various villages for disbursement of amounts to Zamindars who were given advances to make sure that tey sell their produce through the assessee. As such the amount was admissible and should have been allowed. The Supreme Court in the case of Ramniklal Kothari has laid down a general proposition that the business carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... travelling bank charges, lodging, periodicals, telephone, salary to employee were allowable expenditure However, since assessee had agreed to disallowance of 25 per cent of expenditure, disallowance directed to restricted to the extent 2.8 It is respectfully submitted that the claim of depreciation is apparently allowable against the business income, and inadvertently the same had been claimed set off against income from other sources. The deduction of such business expenditure is also apparently allowable against the business income taxed in the hands of the assessee. 2.9 It is respectfully submitted that similar issue came up for consideration before the Hon ble ITAT in the case of Shri Sunil Dosi in ITA No. 53/Jodh/2020 for A.Y. 2016-17, in which the claim of depreciation under similar facts was directed to be allowed. The copy of the said decision of Hon ble ITAT is attached, and in view of the said decision also the claim of the deduction may kindly be allowed to the appellant. 2.10. It is therefore submitted that the claim of expenses against business income may kindly be allowed to the assessee. It is also submitted that the claim of depreciation had been allowed in the earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) and ld. CIT(A) has not considered the contentions so raised by the assessee and he confirmed the finding of ld. AO. Before us, the ld. AR of the assessee submitted that the main source of income of interest received for Rs. 37,79,734/- and rest of the interest received on various advance given totally to Rs. 66,83,393 offered as interest income as gross in other source and from that expenditure for an amount of Rs. 61,11,788/- on money borrowed claimed u/s. 57 of the Act. Since the income of the firm interest is not offered the ld. AO also not allowed the interest and considered the claim of interest expenditure on for Rs. 9,60,107/- considering it as related to the interest received on partnership firm where the assessee is a partner and derives income in the form of salary, interest and share of profits from these firms. The assessee is partner in M/s Kanhiyalal Rakesh Kumar Co, M/s Balaji Enterprises, M/s Jagdamba Exports, and M/s Jagdamba Enterprises. The remuneration received from the various firms in which the assessee is a partner was shown as business income, while the interest income received form these firms was disclosed as income from other sources includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. Considering the overall aspect of the matter we note that the interest income and expenditure is disputed because the assessee claimed income in other source the ld. AO also not allowed the interest expenses merely on the reason that the assessee has not proved the nexus but when the loans are of earlier year and the money is rotating and not having direct nexus but considering the aspect of the fact the interest income is higher then the interest expenditure the observation of the lower authority in sustaining the addition is purely based on the surmises and conjecture which we not correct. The ld. AO cannot direct the assessee to prove each rotating fund to prove with having direct nexus when interest earned is higher then the interest paid and there is no allegation of diversion of fund, thus, the interest expenditure cannot be denied to the assessee. We also find from the record that the assessee has in total offered the interest income of Rs. 66,83,393/- and claimed the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Hon'ble Apex Court in favour of the assessee holding that it was pure business expenditure and following the said decision of Hon'ble Apex Court on the similar issue, the disallowance made was deleted. In another case of MKJ Tradex Ltd. v. CIT reported in 62 ITR_Trib 632 (Kol) the Tribunal observed that the clubs provided several kinds of facilities such as conferences, business meetings, as well as provision for multimedia exhibition. Many clubs allow membership to companies or other business entities. By visiting clubs, chances of making new contacts improve. With new contacts people can do more interactions which can be beneficial for business and profession. Therefore, business organizations like company, firm, bank, co-operative society etc. functions through human agencies which may be directors or other officers of business organization. The purpose of the expenditure is to have a suitable platform for meeting people and getting advantages of meeting many people at a time to maintain old contacts and also to make new contacts. Following these decisions, we hold that the disallowance of such payment which was incurred in business expediency cannot be disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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