YOGENDRA GARG, Jaipur V. ITO, Jaipur

ITA 149/JPR/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6136 (ITAT-JAIPUR)
• Duration Of Justice: 2 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 29-05-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 19-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SEEMA MEENA JCIT DHK
• Keywords: Business expenditure; Salary income; Principle of natural justice; Difference of opinion; Competent authority; Commercial expediency
• Section: 143(3); 260A; 37(1); 37; 56

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S, JAIPUR JH FOT; IKY JKWO] U;KF;D LNL; ,OA JH FOE FLAG ;K NO ] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM AND SHRI VIKRAM SING H YADAV, AM VK;DJ VIHY LA-@ ITA NO. 149/JP/2016 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2012-13. SHRI YOGENDRA GARG, C-41, INDER VILLA, LAJPAT MARG, C-SCHEME, JAIPUR. CUKE VS. THE INCOME TAX OFFICER, WARD 7(2), JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AARPG 4322 L VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY : SHRI VINOD KUMAR GUPTA (CA) JKTLO DH VKSJ LS@ REVENUE BY : SMT. SEEMA MEENA (JCIT) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 27.03.2018. ?KKS'K .KK DH RKJH[K@ DATE OF PRONOUNCEMENT : 27/04.2018. VKNS'K@ ORDER PER VIJAY PAL RAO, JM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 29 TH DECEMBER, 2015 OF LD. CIT (A)-III, JAIPUR FOR THE ASSESSMENT YEAR 2012-13. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS :- 1. IMPUGNED ASSESSMENT ORDER PASSED U/S 143(3) IS BAD IN LAW AND ON FACTS BEING AGAINST THE PRINCIPAL OF NATURAL JUSTICE AND FOR MANY MORE OTHER REASONS. 2. UNDER THE FACTS AND CIRCUMSTANCES, THE LD. A.O. HAS ERRED BY NOT FOLLOWING LAW LAID DOWN REGARDING SECTION 57(III) B Y HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RAJENDRA PRASAD MOODY (1978) 115 ITR 519 AND FURTHE R ERRED BY HOLDING THAT SAID JUDGMENT AND OTHER RELIED UPON CASE LAWS DO NOT PERTAIN TO THE CASE, WITHOUT POINTING OUT EV EN A SINGLE DISTINGUISHABLE REASON FOR SUCH FINDING. FURTHER, L D. CIT (A) HAS ERRED BY WRONGLY DISTINGUISHING THE JUDGMENT OF APE X COURT. 2 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 2 3. UNDER THE FACTS AND CIRCUMSTANCES, THE LD. A.O. AS WELL AS LD. CIT (A) HAS ERRED BY A. HOLDING THAT EXCESS OF EXPENDITURE OVER INCOME IS N OT ALLOWABLE UNDER SECTION 57(III) OF THE ACT. B. HOLDING THAT INTEREST EXPENSES INCURRED, TO EARN IN TEREST INCOME IS NOT WHOLLY AND EXCLUSIVELY FOR EARNING IN TEREST INCOME. 4. UNDER THE FACTS AND CIRCUMSTANCES, THE LD. A.O. AS WELL AS LD. CIT (A) HAVE ERRED BY NOT ALLOWING THE INTEREST EXP ENDITURE INCURRED. 5. UNDER THE FACTS AND CIRCUMSTANCES, THE LD. A.O. AS WELL AS LD. CIT (A) HAVE ERRED BY NOT ALLOWING BROKERAGE EXPENS ES, INCURRED IN RELATION TO RAISE LOAN TO GIVE FURTHER ON INTEREST, AS DEDUCTION UNDER SECTION 57(III). 6. UNDER THE FACTS AND CIRCUMSTANCES, THE LD. A.O. HAS ERRED BY NOT ALLOWING INTEREST EXPENSES INCURRED IN CONNECTION T O CONSTRUCTION AND ACQUISITION OF HOUSE PROPERTY. FUR THER, LD. CIT (A) HAS ERRED BY HOLDING THAT ASSESSEE DID NOT FURN ISH ANY NEXUS BETWEEN BORROWED FUNDS AND UTILIZATION FOR CONSTRUC TION OF HOUSE PROPERTY AND CONSEQUENTLY UPHOLDING THE ADDIT ION. 7. UNDER THE FACTS AND CIRCUMSTANCES, THE LD. A.O. HAS ERRED BY DETERMINING TOTAL INCOME OF THE APPELLANT TO BE RS. 46,78,364/-. FURTHER, CIT (A) HAS ERRED BY CONFIRMING THE SAME. 8. UNDER THE FACTS AND CIRCUMSTANCES, THE LD. A.O. HAS ERRED BY INITIATING PENALTY PROCEEDING UNDER SECTION 271(1)( C) OF THE INCOME TAX ACT, 1961. 9. THAT THE APPELLANT CRAVES YOUR INDULGENCE TO ADD , AMEND OR ALTER ALL OR ANY GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 2. THE ONLY ISSUE ARISES IN THE APPEAL OF THE ASSES SEE FOR OUR CONSIDERATION AND ADJUDICATION IS REGARDING DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 57(III) OF THE I.T. ACT. THE ASSESSEE IS AN INDIVIDUAL DERIVE D INCOME FROM SALARY, HOUSE 3 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 3 PROPERTY, BUSINESS AND OTHER SOURCES. THE ASSESSEE FILED HIS RETURN OF INCOME ON 28 TH SEPTEMBER, 2012 DECLARING NIL INCOME. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS S HOWN UNSECURED LOANS OF RS. 28,95,68,380/- ON WHICH THE ASSESSEE HAS PAID INTER EST OF RS. 3,53,32,281/- AND BROKERAGE EXPENSES OF RS. 34,60,762/-. FURTHER, TH E ASSESSEE HAS SHOWN LOAN AND ADVANCES IN THE BALANCE SHEET OF RS. 22,41,52,760/- ON WHICH THE ASSESSEE HAS RECEIVED INTEREST OF RS. 1,42,90,960/-. THE SAID L OAN WAS GIVEN TO M/S. DEREWALA JEWELLERY INDUSTRIES LTD. HAVING ITS DIRECTORS SHRI PRAMOD KUMAR AGARWAL, SHRI DEBRA NISHAMURA AND SHRI YOGENDRA GARG AS WELL AS TO M/S. GARG GEMS PVT. LTD. HAVING ITS DIRECTORS SHRI PRAMOD KUMAR AGARWAL AND SHRI YOGEND RA GARG. THE AO FURTHER NOTED THAT LOANS AND ADVANCES WERE ALSO GIVEN TO OTHER PA RTIES FROM WHOM INTEREST ON LOANS AND ADVANCES WAS NOT RECEIVED BY THE ASSESSEE . THE AO PROPOSED TO DISALLOW THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE AG AINST THE INTEREST INCOME UNDER SECTION 57(III) OF THE ACT ON THE GROUND THAT THE S AID EXPENDITURE WAS NOT INCURRED FOR EARNING THE INCOME UNDER THE HEAD OTHER SOURCES . IN REPLY, THE ASSESSEE SUBMITTED THAT THE INTEREST WAS PAID TO LARGE NUMBE R OF LENDERS AS AGAINST THE INTEREST RECEIVED OF RS. 1,42,90,960/- FROM M/S. DE REWALA JEWELLERY INDUSTRIES LTD. AND M/S. GARG GEMS PVT. LTD. AS WELL AS SHRI GAURAV RUNGTA. IT WAS FURTHER CONTENDED THAT THE INTEREST WAS PAID AS PER THE PRE VAILING RATE AS THE LOAN WAS TAKEN ON SHORT TERM BASIS WHEREAS THE INTEREST CHARGED FR OM THESE CONCERNS IS AS PER THE RATE OF LONG TERM BASIS. THE ASSESSEE HAS ALSO CONT ENDED THAT IT WAS A COMMERCIAL DECISION OF THE ASSESSEE TO GIVE LOANS AND ADVANCES TO THESE CONCERNS AND, THEREFORE, THE EXPENDITURE ON ACCOUNT OF INTEREST W AS INCURRED WHOLLY AND EXCLUSIVELY FOR EARNING THE INTEREST INCOME AND CONSEQUENTLY IS AN ALLOWABLE CLAIM. THE AO DID 4 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 4 NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND DISAL LOWED THE CLAIM OF THE ASSESSEE AND CONSEQUENTLY THE LOSS DECLARED BY THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES TO THE TUNE OF RS. 2,32,83,036/- WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. THE ASSESSEE CHALLENGED TH E ACTION OF THE AO BEFORE THE LD. CIT (A) AND SUBMITTED THAT THE VARIATION IN THE INT EREST RATE PAID BY THE ASSESSEE AND RECEIVED FROM THESE CONCERNS IS MAINLY DUE TO T HE REASON THAT THE ASSESSEE RAISED MONEY, SOURCED BY FINANCE BROKERS FOR SHORT PERIOD I.E. FOR 2 MONTHS AND AT EVERY MATURITY ASSESSEE REPLACED THE EARLIER BORROW ING WITH NEW BORROWINGS. THUS THE ASSESSEE PAID INTEREST AS PER THE PREVAILING IN TEREST RATE ON THE SHORT TERM BORROWING. WHEREAS THE INTEREST HAS BEEN CHARGED FR OM THE ASSOCIATES CONCERNS ON LONG TERM BASIS WHICH HAS CAUSED THE DIFFERENCE IN THE RATE OF INTEREST AND THE LOSS UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASSE SSEE ALSO CONTENDED THAT THE GENUINENESS OF THE TRANSACTION OF BORROWING THE MON EY THROUGH FINANCE BROKERS AND GIVING THE ADVANCES TO THE ASSOCIATES CONCERNS IS N OT DISPUTED. THEREFORE, EVEN IF THE INCOME FROM THE SAID INVESTMENT IS LESS THAN TH E EXPENDITURE, THE SAME CANNOT BE A REASON FOR DISALLOWANCE OF CLAIM OF EXPENDITUR E. THE ASSESSEE RELIED UPON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF M/S. ATIR TEXTILE INDUSTRIES PVT. LTD. VS. DCIT, 230 TAXMAN 104 (GUJ.). THE ASSESSEE ALSO RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF HERO CYCLES PVT. L TD. VS. CIT, 379 ITR 347 (SC) AS WELL AS A SERIES OF OTHER DECISIONS. HOWEVER, THE LD. CIT (A) WAS NOT IMPRESSED WITH THE CONTENTION OF THE ASSESSEE AND HELD THAT THE AS SESSEE HAS NOT FILED ANY JUSTIFICATION FOR GIVING LOANS TO THE SISTER CONCER NS AT LOWER RATE AND TO THE OTHER PARTIES WITHOUT INTEREST. 5 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 5 3. BEFORE US, THE LD. A/R OF THE ASSESSEE HAS SUBMI TTED THAT IT WAS EXPLAINED BEFORE THE LOWER AUTHORITIES THAT VARIATION IS MAIN LY DUE TO THE REASON THAT, APPELLANT RAISED MONEY, SOURCED BY FINANCE BROKERS, FOR SHORT PERIODS I.E. MOSTLY 2 MONTHS AND AT EVERY MATURITY ASSESSEE REPLACED THE EARLIER BORROWING WITH NEW BORROWINGS. THAT APPELLANT HAS TO PAY INTEREST ACCORDING TO THE RATE PREVAILING AT THAT PARTICULAR POINT OF TIME FOR A DURATION FOR WHICH MONEY IS BOR ROWED I.E. 2 MONTHS. WHEREAS, THE INTEREST HAS BEEN CHARGED FROM ASSOCIATES CONCE RNS ON LONG TERM BASIS AND INTEREST HAS BEEN PAID FOR LOAN WHICH IS RAISED ON SHORT TERM BASIS. OBVIOUSLY, THERE WOULD BE DIFFERENCE IN RATE OF INTEREST AND ONLY DU E TO THAT THERE IS AN EXCESS OF INTEREST PAYMENT OVER RECEIPT OF INTEREST. IT WAS F URTHER EXPLAINED THAT WITHOUT USING THE BORROWED MONEY ASSESSEE COULD NOT RECEIVE THE I NTEREST. THE LD. A/R FURTHER SUBMITTED THAT DURING THE ASSESSMENT PROCEEDINGS, C ONFIRMATIONS OF LENDERS AND ASSOCIATES CONCERNS, FINANCE BROKERS AND ASSESSEES BANK ACCOUNT WERE ALSO FILED FOR EXAMINATION, DEMONSTRATING THE NATURE AS EXPLAINED; THEREFORE, GENUINENESS IS NOT UNDER DISPUTE. THUS, THE USE OF BORROWED FUND FOR A DVANCING THE SAME IS NOT UNDER DISPUTE. THEREFORE, NEITHER DIFFERENCE IN RATE OF INTEREST NOR BROKERAGE EXPENSES CAN BE A CAUSE TO REACH THE CONCLUSION THAT MONEY HAS N OT BEEN LAID OUT FOR MAKING OR EARNING SUCH INCOME, SINCE, IT IS CLEAR IN THIS CAS E THAT LOANS HAVE BEEN GIVEN FOR LONG TERM AND BORROWINGS HAVE BEEN MADE FOR SHORT T ERM. THE LD. A/R SUBMITTED THAT THE DECISION OF RATE OF INTEREST TO BE PAID OR CHARGED IS A SOLE COMMERCIAL DECISION AND CANNOT BE CHALLENGED SOLELY ON THE BAS IS THAT THERE IS LOSS. IN THIS REGARD, THE LD. A/R PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DALMIA CEMENT PVT. LTD., 254 ITR 377 (DELHI.). HE HAS ALSO PLACED RELIANCE ON RECENT JUDGMENT OF HONBLE GUJAR AT HIGH COURT IN THE CASE OF ATIR 6 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 6 TEXTILE INDUSTRIES PVT. LTD. VS. DCIT, 230 TAXMAN 1 04, WHEREIN IT HAS BEEN HELD THAT DEDUCTION U/S 57(III) IS ALLOWABLE EVEN IF THE RATE AT WHICH INTEREST IS PAID IS MORE COMPARED TO RATE AT WHICH INTEREST IS EARNED. 3.1. THE LD. A/R HAS POINTED OUT THAT THE COMPLETE BANK ACCOUNTS, DETAILS AS REQUIRED WERE FILED DURING THE ASSESSMENT PROCEEDIN GS. THE LD. A.O. AS WELL AS LD. CIT (A) IN THEIR ORDER HAS COME TO CONCLUSION THAT THERE WAS UNSECURED LOANS OF RS. 28,95,68,380.25 AND THE LOANS AND ADVANCES ON WHIC H INTEREST WERE CHARGED WAS RS. 22,41,52,759.53, MEANING THEREBY, TO THE EXTENT OF LOANS & ADVANCES GIVEN AS STATED OUT OF BORROWED FUND HAS BEEN LAID OUT AND U TILIZED FOR SUCH LOANS & ADVANCES. HE HAS REITERATED HIS RELIANCE ON THE D ECISION OF HONBLE GUJARAT HIGH COURT IN CASE OF M/S. ATIR TEXTILE INDUSTRIES PVT. LTD. VS. DCIT (SUPRA) AS WELL AS THE DECISION OF HONBLE SUPREME COURT IN CASE OF M/S. H ERO CYCLES PVT. LTD. (SUPRA). FURTHER HE HAS RELIED UPON THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN CASE OF CIT VS. MURLI MANOHAR, 101 TAXMAN 114 (ALL.) AND DE CISION OF HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. PRUTHVI BROKERS & SHAREHOL DERS PVT. LTD., 349 ITR 336 (BOM.). THE LD. A/R HAS FURTHER SUBMITTED THAT THE AO FOR THE ASSESSMENT YEAR 2013-14 WHILE FRAMING THE ASSESSMENT UNDER SECTION 143(3) VIDE ORDER DATED 30 TH MARCH, 2016 HAS ACCEPTED THE CLAIM OF THE ASSESSEE AND HAS NOT MADE ANY DISALLOWANCE ON THIS ACCOUNT. 4. ON THE OTHER HAND, THE LD. D/R HAS RELIED UPON T HE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAS FACILITAT ED THE FUNDS TO ITS SISTER CONCERNS BY TAKING THE LOANS FROM THE MARKET AND, THEREFORE, IT WAS NOT AN EXPENDITURE INCURRED FOR EARNING THE INTEREST INCOME AS PER PRO VISIONS OF SECTION 57(III) OF THE ACT. THE LD. D/R HAS FURTHER CONTENDED THAT THE DEC ISION RELIED UPON BY THE ASSESSEE 7 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 7 ARE NOT APPLICABLE IN THE FACTS OF THE PRESENT CASE AS IN THOSE CASES THE EXPENDITURE HAD DIRECT NEXUS WITH THE INCOME EARNED UNDER SECTI ON 56 OF THE IT ACT. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS SHOWN LOSS UNDER THE HEAD INCOME FROM OTHER SOURCES OF RS. 2,32,83,036/- DUE TO THE DIFFERENCE IN THE INTE REST PAID BY THE ASSESSEE ON BORROWED FUNDS AND CORRESPONDING RECEIPT OF INTERES T INCOME ON THE LOANS AND ADVANCES GIVEN TO THE SISTER CONCERNS/ASSOCIATES CO NCERNS. THERE IS NO DISPUTE THAT THE ASSESSEE TOOK THE LOANS AND THE MONEY WAS GIVEN TO THE SISTER CONCERNS. THE ASSESSEE HAS TAKEN THE PLEA THAT THE ASSESSEE HAS F UNDED THE SISTER CONCERNS WHICH IS A COMMERCIAL DECISION AND, THEREFORE, WHEN THE T RANSACTION OF ADVANCING LOAN TO THE SISTER CONCERNS IS BASED ON COMMERCIAL EXPEDIEN CY THEN THE CORRESPONDING INTEREST EXPENDITURE ON THE BORROWED FUNDS CANNOT B E DISALLOWED. THE PAYMENTS OF INTEREST AS WELL AS RECEIPT OF INTEREST ARE NOT IN DISPUTE. THEREFORE, THE ONLY QUESTION IS WHETHER THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE ON THE BORROWED FUND IS AN ALLOWABLE EXPENDITURE UNDER SECTION 57(III) O F THE ACT. THERE IS NO DENIAL THAT THE MONEY BORROWED BY THE ASSESSEE WAS GIVEN TO THE SISTER CONCERNS ON WHICH THE ASSESSEE HAS EARNED THE INTEREST THOUGH THE SAID IN TEREST WAS LESS THAN THE EXPENDITURE INCURRED BY THE ASSESSEE. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF M/S. ATIR TEXTILE INDUSTRIES PVT. LTD. VS. DCIT (SU PRA) WHILE DEALING WITH AN IDENTICAL ISSUE IN PARA 8 TO 15 HAS HELD AS UNDER :- 8. WE HAVE HEARD SUBMISSIONS IN EXTENSO MADE AT BAR A ND MINUTELY EXAMINED THE PRINCIPLES LAID-DOWN IN THE CASE-LAWS CITED AT BAR AS WELL AS SCOPE OF SECTION 57(III) OF THE ACT. 8 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 8 9. TO BEGIN WITH, IT IS USEFUL TO REPRODUCE FIRST THR EE OBSERVATIONS RECORDED BY THE HON'BLE APEX COURT IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS B.V. ( SUPRA ) WHICH READ AS UNDER: ( I ) IT IS THE TASK OF THE COURT TO ASCERTAIN THE LEGAL NATURE OF THE TRANSACTION AND WHILE DOING SO IT HAS TO LOOK AT THE ENTIRE TRANSACTION A S A WHOLE AND NOT ADOPT A DISSECTING APPROACH. ( II ) ALL TAX PLANNING IS NOT ILLEGAL OR ILLEGITIMATE OR IMPERMISSIBLE. ( III ) THERE IS NO CONFLICT BETWEEN MCDOWELL AND AZADI BAC HAO OR BETWEEN MCDOWELL AND MATHURAM AGRAWAL. 9.1 WHILE ANSWERING THE QUESTION 'WHETHER HAVING REGAR D TO RELATIONSHIP BETWEEN DIFFERENT CONCERNS, WHERE A TRANSACTION WHICH IS PA TENTLY IMPRUDENT, TAKES PLACE, THE TAXING AUTHORITY SHOULD EXAMINE THE QUESTION OF BUS INESS EXPEDIENCY AND NOT GO MERELY BY THE FACT THAT THE ASSESSEE HAD TAKEN A DE CISION IN ITS WISDOM WHICH MAY BE WRONG OR RIGHT?', THE LARGER BENCH OF PUNJAB & HARY ANA HIGH COURT IN CASE OF ROCKMAN CYCLE INDUSTRIES (P.) LTD . ( SUPRA ), OBSERVED AS UNDER: '18. SECTION 37 OF THE ACT IS A RESIDUARY SECTION W HICH PROVIDES FOR DEDUCTION ON ACCOUNT OF EXPENDITURE NOT BEING CAPITAL IN NATU RE, WHICH ARE NOT AS SUCH SPECIFIED IN SECTIONS 30 TO 36 OF THE ACT, BUT LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSI ON, WHILE COMPUTING THE INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINES S OR PROFESSION'. THE IMPORT OF SECTIONS 37(1)(III) AND 57(III) OF THE AC T WAS CONSIDERED BY HON'BLE THE SUPREME COURT IN CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 . IT WAS A CASE WHERE DIFFERENCE OF OPINION ON THE SUBJE CT BETWEEN VARIOUS JUDGMENTS OF THE HIGH COURTS WAS CONSIDERED AS THE TRIBUNAL HAD DIRECTLY REFERRED THE MATTER FOR OPINION OF HON'BLE THE SUPR EME COURT. THE ISSUE UNDER CONSIDERATION THEREIN WAS WHETHER INTEREST ON MONEY BORROWED FOR INVESTMENT IN SHARES WHICH HAD NOT YIELDED ANY DIVIDEND IS PER MISSIBLE UNDER SECTION 57(III) OF THE ACT. IT WAS OPINED THAT EVEN THOUGH THE LANGUAGE OF SECTION 37(1) IS A LITTLE WIDER THAN THAT OF SECTION 57(III ) OF THE ACT, BUT THAT WAS OF NO EFFECT, AS THE LANGUAGE OF SECTION 57(III) BEING CL EAR AND UNAMBIGUOUS HAS TO BE CONSIDERED ACCORDING TO ITS PLAIN NATURAL MEANIN G. IT SHOULD NOT BE GIVEN NARROW AND CONSTRICTED MEANING. IT DOES NOT PROVIDE THAT EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. TH E RELEVANT PARAGRAPHS THEREFROM ARE EXTRACTED BELOW: '4. WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITUR E MUST BE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF M AKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVA NT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST B E MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPO SE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES N OT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR E ARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST TH AT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFI T BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57 (III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS 9 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 9 NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE B EEN EARNED AS A RESULT OF THE EXPENDITURE. IT MAY BE POINTED OUT THAT AN IDEN TICAL VIEW WAS TAKEN BY THIS COURT IN EASTERN INVESTMENTS LTD. V. CIT [1951] 20 ITR 1 (SC), WHERE INTERPRETING THE CORRESPONDING PROVISION IN S. 12(2 ) OF THE INDIAN I.T. ACT, 1922, WHICH WAS IPSISSIMA VERBA IN THE SAME TERMS A S S. 57(III), BOSE J., SPEAKING ON BEHALF OF THE COURT OBSERVED: 'IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE W AS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED.' IT IS INDEED DIFFICULT TO SEE HOW, AFTER THIS OBSERVATION OF THE COURT THERE CAN BE ANY SCOPE FOR CONTROVERSY IN REGARD TO THE INTERPRETATION OF S. 57(III). IT IS ALSO INTERESTING TO NOTE THAT, ACCORDING TO T HE REVENUE, THE EXPENDITURE WOULD DISQUALIFY FOR DEDUCTION ONLY IF NO INCOME RE SULTS FROM SUCH EXPENDITURE IN A PARTICULAR ASSESSMENT YEAR, BUT IF THERE IS SOME INCOME, HOWSOEVER SMALL OR MEAGRE, THE EXPENDITURE WOULD BE ELIGIBLE FOR DEDUCTION. THIS MEANS THAT IN A CASE WHERE THE EXPENDITURE IS RS.1,000, IF THERE IS INCOME OF EVEN RE. 1, THE EXPENDITURE WOULD BE DEDUCTIBLE AND THERE WOULD BE RESULTING LOSS OF RS. 999 UNDER THE HEAD 'INCOME FR OM OTHER SOURCES'. BUT IF THERE IS NO INCOME, THEN, ON THE ARGUMENT OF THE RE VENUE, THE EXPENDITURE WOULD HAVE TO BE IGNORED AS IT WOULD NOT 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 PR ODUCE 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 INC OME 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 EXPENDITU RE IS X OR Y OR NIL; WHATEVER IS THE PROPER EXPENDITURE ALLOWED BY THE S TATUTE 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 APPRECIAT E HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE S UCH 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 RE CEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUNTING AND T HE INTERPRETATION OF S. 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITU RE CANNOT, IN THE CIRCUMSTANCES, BE HELD TO BE CONDITIONAL UPON THE M AKING OR EARNING OF THE INCOME. IT IS TRUE THAT THE LANGUAGE OF S. 37(1) IS A LITTL E WIDER THAN THAT OF S.57(III), BUT WE DO NOT SEE HOW THAT CAN MAKE ANY DIFFERENCE IN T HE TRUE INTERPRETATION OF S. 57(III). THE LANGUAGE OF S. 57(III) IS CLEAR AND UN AMBIGUOUS AND IT HAS TO BE CONSTRUED ACCORDING TO ITS PLAIN NATURAL MEANING AN D MERELY BECAUSE A SLIGHTLY WIDER PHRASEOLOGY IS EMPLOYED IN ANOTHER SECTION WH ICH MAY TAKE IN SOMETHING MORE, IT DOES NOT MEAN THAT S. 57 (III) S HOULD BE GIVEN A NARROW AND CONSTRICTED MEANING NOT WARRANTED BY THE LANGUAGE O F THE SECTION AND, IN FACT, CONTRARY TO SUCH LANGUAGE. 10 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 10 THIS VIEW WHICH WE ARE TAKING IS CLEARLY SUPPORTED BY THE OBSERVATIONS OF LORD THANKERTON IN HUGES V. BANK OF NEW ZEALAND [1938] 6 ITR 636, (HL), WHERE THE LEARNED LAW LORD SAID: 'EXPENDITURE IN COURSE OF THE TRADE WHICH IS UNREMU NERATIVE IS NONE THE LESS A PROPER DEDUCTION, IF WHOLLY AND EXCLUSIVELY MADE FO R THE PURPOSES OF THE TRADE. IT DOES NOT REQUIRE THE PRESENCE OF A RECEIPT ON TH E CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPENSE.' 19. THE ISSUE REGARDING JURISDICTION OF THE TAXING AUTHORITIES WAS CONSIDERED BY HON'BLE THE SUPREME COURT IN CIT V. B. M. KHARWAR , [1969] 72 ITR 603 (SC) , WHEREIN IT WAS OPINED THAT A TAXING AUTHORITY IS EN TITLED AND IS INDEED BOUND TO DETERMINE THE TRUE LEGAL RELATION RESULTING FROM A TRANSACTION. THE RELEVANT PARAGRAPH IS EXTRACTED BELOW: 'THE TAXING AUTHORITY IS ENTITLED AND IS INDEED BOU ND TO DETERMINE THE TRUE LEGAL RELATION RESULTING FROM A TRANSACTION. IF THE PARTIES HAVE CHOSEN TO CONCEAL BY A DEVICE THE LEGAL RELATION, IT IS OPEN TO THE T AXING AUTHORITIES TO UNRAVEL THE DEVICE AND TO DETERMINE THE TRUE CHARACTER OF THE R ELATIONSHIP. BUT THE LEGAL EFFECT OF A TRANSACTION CANNOT BE DISPLACED BY PROB ING INTO THE 'SUBSTANCE OF THE TRANSACTION'. THIS PRINCIPLE APPLIES ALIKE TO C ASES IN WHICH THE LEGAL RELATION IS RECORDED IN A FORMAL DOCUMENT, AND TO C ASES WHERE IT HAS TO BE GATHERED FROM EVIDENCE- ORAL AND DOCUMENTARY- AND C ONDUCT OF THE PARTIES TO THE TRANSACTION. THE OBSERVATION MADE BY BOSE J. IN SIR KIKABHAI PREMCHAND V. CIT [1953] 24 ITR 506, (SC) , 'IT IS WELL RECOGNISED THAT IN REVENUE CASES REGARD MUST BE HAD TO THE SUBSTANCE O F THE TRANSACTION RATHER THAN TO ITS MERE FORM. IN THE PRESENT CASE DISREGAR DING TECHNICALITIES IT IS IMPOSSIBLE TO GET AWAY FROM THE FACT THAT THE BUSIN ESS IS OWNED AND RUN BY THE ASSESSEE HIMSELF. IN SUCH CIRCUMSTANCES WE ARE OF T HE OPINION THAT IT IS WHOLLY UNREAL AND ARTIFICIAL TO SEPARATE THE BUSINESS FROM ITS OWNER AND TREAT THEM AS IF THEY WERE SEPARATE ENTITIES TRADING WITH EACH OTHER AND THEN BY MEANS OF A FICTIONAL SALE INTRODUCE A FICTIONAL PROFIT WHICH I N TRUTH AND IN FACT IS NON- EXISTENT', CANNOT BE READ AS THROWING ANY DOUBT ON THE PRINCIPLE THAT THE TRUE LEGAL RELATION ARISING FROM A TRANSACTION ALONE DET ERMINES THE TAXABILITY OF A RECEIPT ARISING FROM THE TRANSACTION.' 20. THE ISSUE AS TO WHETHER AN ASSESSEE, WHO HAD BO RROWED FUNDS CARRYING INTEREST AND ADVANCED PART THEREOF TO ITS SISTER CO NCERN ON INTEREST FREE BASIS, CAN CLAIM DEDUCTION TO THAT EXTENT WAS CONSIDERED B Y HON'BLE THE SUPREME COURT IN SA BUILDERS LIMITED'S CASE (SUPRA). IN THE AFORESAID CASE, HON'BLE THE SUPREME COURT OPINED THAT THE TAX AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESS MAN. IN CASE, IT IS FOUND THAT TRANSFER OF BORROWED FUNDS TO A SISTER CONCERN WAS ON ACCOUNT OF COMMERCIAL EXPEDIENCY EVEN IF THE SAME IS INTEREST FREE, THE DEDUCTION CLAIMED BY THE ASSESSEE CANNOT BE DISALLOWED. HOWEVER, IT W AS NOT LAID DOWN AS A RULE RATHER IT WAS OPINED THAT EACH CASE WILL DEPEND ON ITS OWN FACTS AND ASPECT OF COMMERCIAL EXPEDIENCY IS TO BE EXAMINED BY THE ASSE SSING OFFICER. PARAGRAPHS 31 AND 32 THEREOF ARE EXTRACTED BELOW: '31. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (BHARAT) LTD. [2002] 254 ITR 337 (DELHI) THAT ONCE IT IS ESTABLISHED 11 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 11 THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND TH E PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN T HE ARMCHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRE CTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING RE GARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE CO MPELLED TO MAXIMIZE ITS PROFIT. THE IT AUTHORITIES MUST PUT THEMSELVES IN T HE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHOR ITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUD ENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER O F THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED F OR EARNING PROFITS. 32. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPI NION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CIR CUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL B ENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF C OMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SIST ER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES ( WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE H OLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED L OANS.' [EMPHASIS SUPPLIED] 10. IT IS TRUE THAT FINDING OF FACTS RECORDED BY ALL T HE THREE AUTHORITIES IN THE INSTANT CASE ARE NOT CHALLENGED AND ALSO IT IS NOT A CASE O F THE APPELLANT - ASSESSEE THAT FINDINGS OF FACTS AS RECORDED BY THE ASSESSING OFFI CER, C.I.T. AND THE TRIBUNAL ARE PERVERSE IN NATURE AND, THEREFORE, WE ARE IN AGREEM ENT WITH THE SUBMISSIONS MADE BY LEARNED ADVOCATE MR.BHATT THAT THIS COURT CANNOT TA KE ANOTHER VIEW SO AS TO INTERFERE WITH THE FINDINGS OF FACT IN EXERCISE OF POWERS UND ER SECTION 260A OF THE ACT. 11. BEFORE THE MATTERS ARE TAKEN ON HAND, IT IS RELEVA NT TO NOTE HERE THAT IN THE CASE OF SMT.SWAPNA ROY ( SUPRA ), THE HON'BLE ALLAHABAD HIGH COURT CAME TO THE CONCLUSION THAT THE ASSESSING AUTHORITY HAS RIGHTLY TRIED TO FIND OUT THE DOMINANT PURPOSE WITH REGARD TO INVESTMENT OF BORROWED MONEY IN THE SISTER CONCERN POSSESSING FRACTURED FINANCIAL BODY AND RIGHTLY HELD THAT INVE STMENT IN THE FIRM RUNNING IN DEFICIT SINCE SEVERAL YEARS CANNOT BE HELD EXCLUSIVELY FOR THE PURPOSE TO EARN INCOME AND THUS, IT WAS FOUND AS COLOURABLE DEVICE TO UTILIZE THE FUND OF ONE FIRM IN OTHER SISTER CONCERNS FOR THE PURPOSE OF TRADE OR BUSINESS. NO S UCH FACTUAL FINDINGS ARE FOUND IN THE IMPUGNED ORDERS AND, THEREFORE, THE DECISION RE NDERED IN THE CASE OF SMT.SWAPNA ROY ( SUPRA ) WOULD NOT BE HELPFUL TO THE REVENUE. 12. CONSIDERING THE VARIOUS CASE-LAWS CITED AT BAR, IT IS EVIDENT THAT WHILE CONSIDERING THE CASE TO EXTEND BENEFIT UNDER SECTION 57(III) OF THE ACT, IT IS MANDATORY TO FIND OUT REASON BEHIND INVESTMENT AND, IF THE DOMINANT PURPO SE IS NOT FOR MAKING OR EARNING SOME INCOME, THEN DEDUCTION UNDER SECTION 57(III) O F THE ACT SHALL NOT BE AVAILABLE AND TO ASCERTAIN THE PURPOSE, THE COURTS MAY LIFT T HE VEIL. AT THE SAME TIME, IT IS THE DUTY OF THE COURT TO ASCERTAIN THE LEGAL NATURE OF THE TRANSACTION AND WHILE DOING SO, IT 12 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 12 HAS TO LOOK AT THE ENTIRE TRANSACTION AS A WHOLE AN D NOT ADOPT A DISSECTING APPROACH AS OBSERVED IN CASE OF VODAFONE INTERNATIONAL HOLDINGS ( SUPRA ). IN NUTSHELL, WHILE CONSIDERING THE CASE TO EXTEND BENEFIT UNDER SECTIO N 157(III) OF THE ACT, THE COMPETENT AUTHORITY IS WITHIN ITS RIGHT TO FIND OUT THE LEGAL NATURE OF TRANSACTION AND FOR THAT PURPOSE, IT MAY LIFT THE VEIL BUT WHILE DOING SO, T HE COMPETENT AUTHORITY HAS TO CONSIDER THE TRANSACTION AS A WHOLE AND FOR THAT RE ASON, THE COMPETENT AUTHORITY CANNOT SPLIT THE TRANSACTION IN MORE THAN ONE PART AND SEL ECT ANY PARTICULAR PART SO AS TO SAY THAT SUCH PART IS ILLEGAL OR ILLEGITIMATE OR IMPERM ISSIBLE AND DENY TO EXTEND BENEFITS UNDER SECTION 57(III) OF THE ACT. 13. IT IS AN ADMITTED FACT THAT THE REVENUE HAS NOT DIS BELIEVED THE LOAN TRANSACTION OF RS.3 CRORES WITH THE COMPANY, NAMELY, ARVIND MILLS LTD. AT THE RATE OF 18.5% P.A. AND PAYMENT OF INTEREST AT THE RATE OF 12% TO THE SAID FOUR COMPANIES WHERE, THE APPELLANT - ASSESSEE MADE INVESTMENT. IT IS NOT IN DISPUTE TH AT THE APPELLANT - ASSESSEE INVESTED THE AMOUNT EQUALLY IN THE ABOVE FOUR COMPANIES SO A S TO GET INTEREST AT THE RATE OF 12% P.A. IT IS NOT A CASE OF THE REVENUE THAT THE ESTIM ATED BOOK VALUE OF THE SHARES OF THE SAID COMPANY, AS REPRODUCED HEREINABOVE, IS NOT TRU E OR CORRECT. THUS, THE TRANSACTION OF BORROWING OF RS.3 CRORES AND PAYMENT OF INTEREST AT THE RATE OF 18.5% MADE BY THE APPELLANT - ASSESSEE TO ARVIND MILLS LTD. AND, IN T URN, RECEIPT OF 12% INTEREST BY THE APPELLANT - ASSESSEE FROM THE INVESTMENT MADE BY IT IN THE ABOVE FOUR COMPANIES ARE BELIEVED AND, THEREFORE, THE SAID TRANSACTIONS ARE GENUINE IN NATURE. TO DISALLOW THE DEDUCTION UNDER SECTION 57(III) OF THE ACT, THE ASS ESSING AUTHORITY CONSIDERED THE TRANSACTIONS AS LOAN AND NOT AS OCDS. THE INVESTMEN T MADE BY THE APPELLANT - ASSESSEE IN THE SAID FOUR COMPANIES WERE NOT LOSS M AKING CONCERN AT THE RELEVANT TIME AND, THEREFORE, THE DECISION OF THE APPELLANT - ASS ESSEE TO BORROW THE MONEY AT A HIGHER RATE OF INTEREST AND TO INVEST THE SAME IN T HE SAID FOUR COMPANIES AT THE RATE OF 12% WITH A HOPE TO GET SHARES IN FUTURE WAS MADE TO EARN INCOME. SO, IT APPEARS THAT THE REVENUE SPLITTED THE TRANSACTIONS IN SUCH A MAN NER THAT IT UPHELD THE GENUINENESS OF BORROWING, PAYMENT AND RECEIPT OF INTEREST BUT W HEN QUESTION OF CONSIDERING PAYMENT OF ADDITIONAL INTEREST OF 6.5% CAME INTO CO NSIDERATION, IT TERMED THE SAID PART OF TRANSACTION AS COLOURABLE DEVICE/TAX PLANNING. S O, THE QUESTION IS WHETHER THE REVENUE CAN SPLIT THE TRANSACTION IN THE MANNER IT DID SO. IT IS TRUE THAT THE COURT CANNOT RE-EXAMINE/RE-APPRECIATE THE FINDINGS OF FAC T RECORDED BY THE TRIBUNAL BUT AS A MATTER OF FACT, AFTER SPLITTING TRANSACTION, AS DON E IN THE CASE ON HAND, THE TRIBUNAL WAS REQUIRED TO TERM/TREAT THE ENTIRE TRANSACTION AS A WHOLE COLOURABLE DEVICE. HAD IT BEEN SO, THE MATTER WOULD STAND ON DIFFERENT FOOTING. IN OUR OPINION, THE TRIBUNAL CANNOT SPLIT THE TRANSACTION INTO TWO PARTS OR MORE. FOR T HAT PURPOSE, WE MADE SEARCHING INQUIRY FROM LEARNED ADVOCATE MR.BHATT TO SHOW ANY PROVISION OF LAW UNDER THE ACT OR PRECEDENT WHICH EMPOWERS THE REVENUE TO SPLIT TR ANSACTION INTO TWO OR MORE PARTS AND THEN TO HOLD ANY ONE PARTICULAR PART OF SAID TR ANSACTION AS LEGAL/PERMISSIBLE/ADMISSIBLE AND OTHER PART OF THE SAME TRANSACTION BEING COLOURABLE DEVICE. LEARNED ADVOCATE MR.BHATT COULD NOT LAY HIS FINGER ON ANY PROVISION/PRECEDENT WHICH EMPOWERS THE REVENUE TO D O SO. SO, ONCE THE PRIMARY TRANSACTION OF LENDING, BORROWING AND PASSING OF PA YMENT OF INTEREST IS FOUND TO BE GENUINE, MERELY BECAUSE IT RESULTED INTO EQUAL AMOU NT OF INCOME, IT WOULD NOT BECOME A COLOURABLE DEVICE AND CONSEQUENTLY EARNING ANY DI SQUALIFICATION. 14. AT THIS STAGE, IT IS RELEVANT TO REPRODUCE THE CLO SING OBSERVATIONS MADE IN THE CASE OF SPECIAL PRINTS LTD. ( SUPRA ) AS UNDER: 13 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 13 'BEFORE CLOSING, WE MAY NOTICE THAT IN CASE OF PORRITS AND SPENCER (ASIA) LTD. V. CIT [2010] 329 ITR 222 (P&H): 231 CTR 294 , THE PUNJAB AND HARYANA HIGH COURT HAD SOMEWHAT SIMILAR SITUATION T O TACKLE WITH. REFERRING TO AND RELYING ON THE DECISION OF THE APEX COURT IN THE CASE OF UNION OF INDIA V. AZADI BACHHAO ANDOLAN (2003)263 ITR 706 (SC) AND THE DECISION OF THIS COURT IN THE CASE OF BANYAN AND BERRY V. CIT (1996)222 ITR 831 (GUJ) , IT WAS OBSERVED THAT ONCE THE TRANSACTION IS GENUINE M ERELY BECAUSE IT HAS BEEN ENTERED INTO WITH A MOTIVE TO AVOID TAX, IT WOULD N OT BECOME COLOURABLE DEVICE, EARNING ANY DISQUALIFICATION. IT WAS OBSERV ED AS UNDER (PG.234 OF 329 ITR) 'THE AFORESAID DISCUSSION WOULD SHOW THAT ONCE THE TRANSACTION IS GENUINE MERELY BECAUSE IT HAS BEEN ENTERED INTO WITH A MOTIVE TO A VOID TAX, IT WOULD NOT BECOME A COLOURABLE DEVICE AND CONSEQUENTLY EARN ANY DISQUAL IFICATION. THE HON'BLE SUPREME COURT IN THE CONCLUDING PARAS OF ITS JUDGMENT IN UNION OF INDIA V. AZADI BACHAO ANDOLAN (2003)263 ITR 706 (SC) HAS REJECTED THE SUBMISSION THAT AN ACT, WHICH IS OTHERWISE VALID IN LAW, CANNOT BE TREATED AS NON ES T MERELY ON THE BASIS OF SOME UNDERLYING MOTIVE SUPPOSEDLY RESULTING IN SOME ECON OMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INTEREST AS PER THE PERCEPTION OF THE REVENUE. THE AFORESAID VIEW LOOKS TO BE CORRECT VIEW. IT HAS READY SUPPORT FROM THE DIVI SION BENCH JUDGMENT OF THIS COURT RENDERED IN THE CASE OF CIT V. SATYA NAND MUNJAL [2002] 256 ITR 516 (P&H) AND THE DIVISION BENCH JUDGMENT OF ORISSA HIGH COURT IN THE CASE OF INDUSTRIAL DEVELOPMENT CORPORATION OF ORISSA LTD . V. CIT [2004] 268 ITR 130 AND VARIOUS OTHER JUDGMENTS OF THE DELHI AND MADRAS HIGH COURTS ( SUPRA ).' 15. IN THE RESULT, THE QUESTION IS ANSWERED IN NEGATIV E AND IN FAVOUR OF THE APPELLANT - ASSESSEE AND AGAINST THE REVENUE. HENCE, THE IMPUGN ED ORDERS PASSED BY THE TRIBUNAL ARE SET ASIDE TO THE AFORESAID EXTENT. APP EALS ARE ALLOWED ACCORDINGLY. NO ORDER AS TO COSTS. IN THE CASE IN HAND THE FACTS AND PURPOSE OF TAKING LOANS AND GIVING TO THE SISTER CONCERNS IS NOT IN DISPUTE AND, THEREFORE, MERELY B ECAUSE THE ASSESSEE HAS EARNED LESS INTEREST AND PAID MORE INTEREST CANNOT BE A RE ASON FOR DISALLOWING THE CLAIM OF THE ASSESSEE. THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. MURLI MANOHAR (SUPRA) HAS ALSO CONSIDERED AND DECIDED AN IDENTICAL ISSUE IN PARA 4 & 5 AS UNDER :- 4. AS REGARDS THE FIRST QUESTION, THE CONNECTION BETW EEN THE LOANS AND THE SOURCE OF INCOME IS NOT CHALLENGED. THE QUESTION RAISED IS WH ETHER WHEN THE INVESTMENTS IN RESPECT OF WHICH THE LOANS WERE RAISED DID NOT YIEL D ANY INCOME CAN THE INTEREST PAID 14 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 14 ON SUCH LOANS BE ALLOWED AS AN EXPENDITURE ? THIS C ONTROVERSY STANDS SETTLED BY THE HONBLE SUPREME COURT IN CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 IN WHICH THE HONBLE SUPREME COURT OBSERVED AS UNDER : 'WHAT SECTION 57( III ) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETE RMINING THE APPLICABILITY OF SECTION 57( III ) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INC OME. SECTION 57( III ) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFIL LED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN F ACT NOTHING IN THE LANGUAGE OF SECTION 57( III ) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDI TURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN I N 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. . . .' (P. 522) 5. THEREFORE, THE FIRST QUESTION HAS TO BE ANSWERED I N THE AFFIRMATIVE IN FAVOUR OF THE ASSESSEE. THUS WHAT IS REQUIRED FOR ALLOWING THE EXPENDITURE UNDER SECTION 57(III) OF THE ACT IS THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IN THE CASE IN HAND T HERE IS A DIRECT CONNECTION AND NEXUS BETWEEN THE EXPENDITURE INCURRED ON ACCOUNT O F INTEREST PAID AND THE INTEREST INCOME EARNED BY THE ASSESSEE ON THE LOANS AND ADVA NCES GIVEN TO THE SISTER CONCERNS. 6. EVEN OTHERWISE, THE INTEREST EXPENDITURE IS AN A LLOWABLE CLAIM UNDER SECTION 37 OF THE ACT ON THE GROUND OF COMMERCIAL EXPEDIENC Y AS HELD BY THE HONBLE SUPREME COURT IN CASE OF S.A. BUILDERS VS. CIT, 288 ITR 1 (SC) AS WELL AS THE DECISION IN CASE OF HERO CYCLES PVT. LTD. (SUPRA) W HEREIN THE HONBLE SUPREME COURT HAS REITERATED THE VIEW AS UNDER :- 12. INSOFAR AS LOANS TO THE SISTER CONCERN/SUBSIDIARY COMPANY ARE CONCERNED, LAW IN THIS BEHALF IS RECAPITULATED BY THIS COURT I N THE CASE OF S.A. BUILDERS LTD. V. CIT (APPEALS) [2007 (288) ITR 1/158 TAXMAN 74 ]. AFTER TAKING NOTE OF 15 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 15 AND DISCUSSING ON THE SCOPE OF COMMERCIAL EXPEDIENC Y, THE COURT SUMMED UP THE LEGAL POSITION IN THE FOLLOWING MANNER: '26. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN E XPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT B USINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NO T HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMER CIAL EXPEDIENCY. 27. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT [1979 (118) ITR 200 (SC) ], IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENT IMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMER CIAL EXPEDIENCY, THE INTEREST THEREON COULD NOT HAVE BEEN ALLOWED UN DER SECTION 36(1)(III) OF THE ACT. IN MADHAV PRASAD 'S CASE [ 1979 (118) ITR 200 (SC) ], THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WIT H A VIEW TO COMMEMORATE THE MEMORY OF THE ASSESSEE'S DECEASED H USBAND AFTER WHOM THE COLLEGE WAS TO BE NAMED, IT WAS HELD BY TH IS COURT THAT THE INTEREST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NOT BE SAID THAT IT WAS FOR COMMERCIAL EXPEDI ENCY. 28. THUS, THE RATIO OF MADHAV PRASAD JATIA 'S CASE [ 1979 (118) ITR 200 (SC) ] IS THAT THE BORROWED FUND ADVANCED TO A THIRD PAR TY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOR THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHER THE AMOUNT ADVANCED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXP RESSION 'FOR THE PURPOSE OF EARNING PROFITS' VIDE CIT V. MALAYALAM PLANTATIONS LTD. [ 1964 53 ITR 140 (SC) , CIT V. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [ 1971 82 ITR 166 (SC) ], ETC.' 13. IN THE PROCESS, THE COURT ALSO AGREED THAT THE VIE W TAKEN BY THE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (P.) LTD. [2002] 254 ITR 377/121 TAXMAN 706 WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS ES TABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BU SINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) , THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED T O MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD AC T. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BU T THAT OF A PRUDENT BUSINESSMAN. 14. APPLYING THE AFORESAID RATIO TO THE FACTS OF THIS CASE AS ALREADY NOTED ABOVE, IT IS MANIFEST THAT THE ADVANCE TO M/S. HERO FIBRES LIMITED BECAME IMPERATIVE AS A BUSINESS EXPEDIENCY IN VIEW OF THE UNDERTAKING GIVEN TO THE 16 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 16 FINANCIAL INSTITUTIONS BY THE ASSESSEE TO THE EFFEC T THAT IT WOULD PROVIDE ADDITIONAL MARGIN TO M/S. HERO FIBRES LIMITED TO ME ET THE WORKING CAPITAL FOR MEETING ANY CASH LOSES. 7. WE FURTHER NOTE THAT THE AO IN THE SCRUTINY ASSE SSMENT PASSED UNDER SECTION 143(3) FOR THE ASSESSMENT YEAR 2013-14 VIDE ORDER D ATED 30 TH MARCH, 2016 HAS ALLOWED THE CLAIM OF THE ASSESSEE THOUGH IT WAS RES TRICTED TO THE INCOME UNDER THE HEAD OTHER SOURCES. THEREFORE, THE AO FOR THE ASSE SSMENT YEAR 2013-14 HAS ACCEPTED THE EXPENDITURE ON ACCOUNT OF INTEREST INC URRED FOR EARNING THE INTEREST INCOME AND ACCORDINGLY ALLOWED THE CLAIM OF THE ASS ESSEE TO THE EXTENT OF INTEREST INCOME. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANC ES OF THE CASE AS WELL AS THE DECISIONS AS CITED SUPRA, WE FIND THAT THE DISALLOW ANCE MADE BY THE AO IS NOT JUSTIFIABLE. ACCORDINGLY THE SAME IS DELETED. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER IS PRONOUNCED IN THE OPEN COURT ON 27/04/ 2018. SD/- SD/- ( FOE FLAG ;KNO ) ( FOT; IKY JKWO (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER JAIPUR DATED:- 27/04/2018. DAS/ 17 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 17 VKNS'K DH IZFRFYFI VXZSF'KR@ COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT- SHRI YOGENDRA GARG, JAIPUR. 2. THE RESPONDENT THE ITO WARD 7(2), JAIPUR. 3. THE CIT(A). 4. THE CIT, 5. THE DR, ITAT, JAIPUR 6. GUARD FILE (ITA NO. 149/JP/2016) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASSISTANT. REGISTRAR 18 ITA NO. 149/JP/2016 SHRI YOGENDRA GARG, JAIPUR. 18