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TMI Blog2005 (2) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which are yielding interest income to the assessee. The Assessing Officer is, therefore, directed to work out the quantum of interest expenditure, which is allowable u/s 57(iii) on pro-rata basis as per the details already made available by the assessee and reproduced by the ld. CIT(A) in his order, in respect of all the three assessment years. Opportunity shall be allowed to the assessee. In the result, while the appeals are allowed. - HON'BLE R.K. GUPTA, JUDICIAL MEMBER AND K.K. BOLIYA, ACCOUNTANT MEMBER For the Appellant : Yogesh Thar, Adv. For the Respondent : Mahesh Kumar, Adv. ORDER Per K.K. Boliya, Accountant Member 1. These three appeals filed by the assessee and arising from the common order dated 4-2-2003 of CIT(A)-V, Mumbai, are disposed of by this common order as grounds of appeal are common. 2. The first ground of appeal, which is identical for all the three assessment years, pertains to the finding of the Revenue authorities that no expenditure against the gross interest income earned by the assessee during the pre-operative period, is deductible under section 57(iii) of the Income-tax Act. The facts may be stated in brief. The assessee-company had undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound was disposed of by the Tribunal at Para 8 of the order in the following manner: We have carefully considered the rival contentions. In our view, it would not be proper or just to throw out the assessee's claim at the threshold itself, merely because it was not put forth in the manner in which it has been done before us by the assessee. Having regard to the principles laid down by the Supreme Court in the case of CIT v. Mahalaxmi Textile Mills Ltd 66 ITR 710, we permit the assessee to raise the plea before us for the first time, since it arises out of ground No. 2 and is intricately connected with the same. Further, there is force in the plea inasmuch as it challenges the action of the IT authorities in bringing to tax the gross income which would be contrary to the basic tenets of Income-tax laws. However, there are no materials before us to show the extent of such expenditure, which would qualify for deduction under section 57(iii). While, therefore, admitting the assessee's claim in principle, we remit the matter to the file of the Assessing Officer who will verify whether the assessee has incurred any expenditure for the purpose of earning of making the income withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of quantifying of expenditure deductible under section 57(iii). The ITAT approved that part of the expenditure has to be allowed under section 57(iii) and gross interest income cannot be brought to the charge of tax. Therefore, the issue was sent back to the Assessing Officer. However, the Assessing Officer has completely disallowed the claim for deduction under section 57(iii) without going into the factual position, which was explained before him. The ld. counsel pointed out that complete details of cost of funds and yield on investment on pro-rata basis in respect of the three assessment years were submitted before the Revenue authorities. It is pointed out that the assessee-company was having resources by way of capital as also by way of funds borrowed from various financial institutions. All these resources were mixed and therefore the assessee worked out the details of expenses deductible under section 57(iii) on pro-rata basis. The statements of pro-rata allocation of the cost of borrowings and administrative expenses have been reproduced by the CIT(A) at pages 2 to 4 of his order. The ld. counsel for the assessee argued that the principle of apportionment of expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in view of the provisions of sections 36(1)(iii) and 57(iii) of the Income-tax Act, 1961, the Tribunal was right in law in not allowing the claim of the assessee that the entire interest payment should be allowed as business expenditure for the assessment years 1974-75 and 1975-76. There was nothing on record to establish that the entire amount of interest was paid in respect of capital borrowed for the purposes of the business. Shri Yogesh Thar further submitted that for the purposes of the Income-tax Act, what is important is the actual use of the borrowed funds and not the motive at the time when the funds are borrowed. He relied on the Supreme Court decision in the case of India Cement Ltd. v. CIT [1966] 60 ITR 52. Our attention was invited to the observations of the Hon'ble Supreme Court at page 63 of the Report, which are extracted below: A loan may be intended to be used for the purchase of raw material when it is negotiated, but the company may, after raising the loan, change its mind and spend it on securing capital assets. Is the purpose at the time the loan is negotiated to be taken into consideration or the purpose for which it is actually used? Further suppos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the point of view of assessee who knows best how his business has to be run but such a point of view has to be a prudent and reasonable point of view which is free from an apparent taint of excessiveness, collusiveness or colourable discretion. Thus, on the one hand, it is not for the ITO to judge whether the assessee could have avoided to reduce a particular expenditure but on the other, an unreasonably high or excessive expenditure would normally and correctly caution the ITO to examine it more carefully and, if combined with other circumstances, it leads to the conclusion that the motive behind the expenditure is to unduly benefit someone, the ITO is well within his rights to come to a finding that the expenditure is not exclusively for the purposes of business. Relationship by itself, without more, cannot lead to the inference of excluding the possibility of a payment being wholly and exclusively for the purpose of business. Dealing with relatives in contrast with or in preference to strangers is neither prohibited by law nor can be tabooed. Indeed, it is natural to do so but this does not give a licence to cover up dishonest transactions or impermissible transfers. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR also brought to our notice the ITAT, Mumbai Bench order dated 30-9-2004 in the case of Ms. Ila R. Ambani, copy of which has been filed. At Para 8 of this order, it has been observed by the assessee that in order to examine the deductibility of an expense under section 57 (iii) what is to be examined is whether or not such an expenditure is incurred 'wholly and exclusively for the purpose of making or earning such income'. The expenditure must be incurred for the purpose of earning the income. The ld. DR also relied on the Supreme Court decision in the case of Smt. Padmavati Jaikrishna v. Addl CIT [1987] 166 ITR 176 for the proposition that unless the loan is incurred for meeting the liability connected with the source itself, it would ordinarily be difficult to entertain the claim for deduction of interest paid thereof under section 57(iii). Finally, Shri Mahesh Kumar invited our attention to the ITAT, Indore Bench decision in the case of Mandideep Engg. Packaging Industries (P.) Ltd. v. Dy. CIT [2001] 77 ITD 307. It is submitted that this is a direct decision on the issue and the ld. DR invited our attention to the short headnote of this case, which is as under: Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal, while restoring the matter was well aware of the fact that all the expenses are consolidated and expenses which are allowable under section 57(iii) have to be identified, which can be done only by apportionment on a logical and concrete basis. While completing the fresh assessment on this issue, the Assessing Officer did not carry out any exercise to verify as to whether the details of apportionment filed by the assessee before him are accurate or whether such details suffer from any factual errors. The Assessing Officer did not apply his mind to this question, but right from the very beginning, he proceeded with the assumption that the assessee's claim is not allowable at all under section 57(iii). Besides, the observation made by the Tribunal in their order dated 20-8-2001, we find the principle of apportionment of the expenses finds support from the cases relied upon by the ld. counsel for the assessee in the case of Continental Construction Ltd. The Hon'ble Supreme Court held that the principle of apportionment has always been applied in different contexts. It was further observed by the Supreme Court that when the receipts and expenses are consolidated, such recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure, part of which is deductible under section 37(1) [or for that matter under section 57(iii)]. In such cases, would it be reasonable to disallow the entire expenditure on the ground that a fraction of the expenditure does not pertain to business purposes. In our view, such a strict interpretation would defeat the very purpose of section 37(1) or section 57(iii). In such a situation, in our view, the expenditure has to be apportioned and it is well known that the principle of apportionment is normally applied by the Income-tax Department in such cases. For example, if expenses like telephone expenses, motor car expenses, travelling expenses etc. arc found to contain personal element also, the disallowance is made on estimate basis to cover such personal element. In other words, the expenditure is apportioned between legitimate business expenditure and personal expenses. It is true that the ITAT, Indore Bench, in the case of Mandideep Engineering Packaging Industries P. Ltd. has taken a different view and they have held that the expenditure cannot be apportioned for the purposes of section 57(iii). However, we find that the cases which have been cited before us on behalf of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od/365) (I) 2,85,14,902/- Average annualized yield 11.70% Carrying cost of rupee funds raised (details as per separate statement) (A) 1,15,58,750/- Weighted Funds Raised (annualized) (Total Funds used X Period utilized/365) (B) 8,79,44,267/- Cost of Funds raised (C)=A/B 13.14% Cost of Funds invested I+C 37,47,790/- Administrative Costs (X) (As per company accounts for the year) (to the extent related to corporate finance activities) Salaries and wages (20%) 12,04,135/- 2,40,827/- Printing and stationery (25%) 1,11,809/- 27,952/- Postage and telephone (25%) 4,86,182/- 1,21,546/- Corporate publicity charges (20%) 20,14,766/- 4,02,953/- Conveyance, vehicle and local travelling (20%) 4,76,620/- 95,324/- Professional expenses (25%) 1,68,383/- 42,096/- Sundry expenses (10%) 9,78,260/- 97,826/- 10,28,524 /- Assessment year 1994-95: Amount (Rs.) Pre-operative income (details as per separate statement) 1,29,76,992/- Weighted Investment Funds (annualized) (Funds Invested X Period/365) (I) 8,03,10,239/- Average annualized yield 16.16% Carrying cost of rupee funds raised (details as per separate statement) (A) 2,68,93,204/- Weighted Funds Raised (annualized) (Total Funds used X Period utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned to the investment which are yielding interest income to the assessee. The Assessing Officer is, therefore, directed to work out the quantum of interest expenditure, which is allowable under section 57(iii) on pro-rata basis as per the details already made available by the assessee and reproduced by the ld. CIT(A) in his order, in respect of all the three assessment years. Opportunity shall be allowed to the assessee. 9. In ITA No. 2986 for the assessment year 1993-94, the ground No. 2 raised by the assessee is as under: The ld. CIT(A) erred in not adjudicating the ground raised before him of inclusion of the additional tax of Rs. 3,83,673/- levied under section 143(1A), in the demand raised in consequence of the impugned assessment. 10. We find that no such ground of appeal was ever raised by the assessee before the CIT(A) as per grounds of appeal accompanying Form No. 35, which is on record. Naturally, the ld. CIT(A) had no occasion to deal with this issue. The ground raised before us does not arise from the orders of the Revenue authorities and therefore the same is rejected. 11. The last ground of appeal, which is common for all the three assessment years, pertains to levy o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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