VIPULA J. CHOKSI, MUMBAI V. I.T.O.8(3)(4), NAVI MUMBAI

ITA 215/MUM/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 3185 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2015
• Appeal Filed By: Assessee
• Bench Allotted: F
• Next Hearing Date: 02-07-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 07-01-2013
• Court: TRIBUNAL
• Department Lawyers: AJAY R SINGH; R V SHAH ABANI KANTA N
• Keywords: Business expenditure; Principle of natural justice; Commercial expediency; Condonation of delay; Capital expenditure
• Section: 80HHC; 37; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F MUMBAI. BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 VIPULA J . CHOKSI GROUND FLOOR, GUFIC BUILDING SUBHASH ROAD A, VILE PARLE, MUMBAI 400 057. V. INCOME TAX OFFICER - 8(3) - 4 AAYKAR BHAVAN MUMBAI 400 020. PAN/GIR NO. ACXPC242 6M ASSESSEE RESPONDENT ORDER PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 17.10.2012 OF C OMMISSIONER OF I NCOME T AX (A PPEALS ) - 18,MUMBAI(HEREINAFTER CALLED AS TH E CIT(A) ) FOR ASSESSMENT YEAR 2009 - 10. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1.1 APPELLANT SUBMITS THAT CIT(A) HAS ERRED IN HOLDING THAT AO HAS RIGHTLY DISALLOWED THE INTEREST OF RS. 16,68,880/ - PAID TO SARASWAT CO - ASSESSE E BY SHRI AJAY R. SINGH & R.V. SHAH REVENUE BY ABANI KANTA NAYAK DATE OF HEARING 10.09.2015 DATE OF PRONOUNCEMENT 28 .09.2015 ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 2 | P A G E OP. BANK LTD. T HEREFORE , APPELLANT PRAYS THAT THE CLAIM OF THE ASSESSEE BE ALLOWED U/S 57 OF THE I.T.ACT, 1961 2.1 WITHOUT PREJUDICE TO ABOVE, APPELLANT SUBMITS THAT CIT(A) HAD FAILED TO APPRECIATE THAT HAD ASSESSEE NOT MADE FIXED DEPOSIT AND OBTAINED OVER - DRAFT, IT WOULD LENT THE MONEY DIRECTLY, IN WHICH CASE THERE WOULD HAVE BEEN NO INTEREST INCOME ON FIXED DEPOSIT AND NO INTEREST EXPENSE ON OVERDRAFT. THEREFORE, MODE OF LENDING SHOULD NOT PREJUDICE THE A PPELLANTS CLAIM OF DEDUCTION. 3.1 IN ALTERNATIVE AND WITHOUT PREJUDICE TO ABOVE, THE APPELLANT IS IN THE BUSINESS OF MONEY LENDING AND CONSEQUENTLY, INTEREST PAID OF RS. 16,68,880/ - BE ALLOWED AS A DEDUCTION U/S 36(1)(III) OF I. T. ACT, 1961. 2. THE ASSESSEE HAS FILED THE APPEAL LATE BY 1 DAY AND IN SUPPORT OF WHICH THE ASSESSEE HAS FILED APPLIC ATION FOR CONDONATION OF DELAY AND AFFIDAVIT ALONG WITH MEDICAL CERTIFICATE TO SUPPORT HER CONTENTION FOR DELAY OF 3 DAYS DUE TO MEDICAL REASONS DUE TO THE ILLNESS OF THE ASSESSEE FROM THE PERIOD FROM 29 TH DECEMBER 2012 TO 4 TH JANUARY 2013 . THE ASSESSEE COUNSEL SUBMITTED THAT DELAY IS OF 1 DAY AND NOT 3 DAY AS PER AFFIDAVIT SUBMITTED AS THE APPEAL OUGHT TO HAVE BEEN FILED ON 4 TH JANUARY 2013 BUT WAS FILED ON 7 TH JANUARY 2013, THE 5 TH AND 6 TH JANUARY 2013 BEING SATURDAY AND SUNDAY WERE HOLIDAYS. WE ACCEPT THE CONTENTION S OF THE ASSESSEE AND CONDONE THE DELAY IN FILING APPEAL. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS FILED ITS RETURN OF INCOME ON 31.03.2010, DECLARING TOTAL INCOME OF RS. 29,76,148/ - , WHICH WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 3 | P A G E ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS SHOWN INCOME FROM OTHER S OURCES MAINLY COMPRISING OF INTEREST AND CLAIMED DEDUCTION OF INTEREST EXPENDITURE AS UNDER : - INCOME FROM OTHER SOURCES: INTEREST RECEIVED FROM/ON LOAN 20,57,614 FIXED DEPOSIT 17,99,448 SAVINGS ACCOUNT 73,275 TAXABLE GOVERNMENT BOND 7,20,000 46,50,337 LESS: INTEREST PAID ON LOAN . ( - ) 16,68,880 PROFESSIONAL TAX . ( - ) 2,500 GROSS TOTAL INCOME 29,78,957 _________ 4 . THE ASSESSING OFFICER ENQUIRED AS TO HOW THE ASSESSEE HAS ADJUSTED INTEREST PAID ON OVERDRAWING FROM THE SARASWAT COOP. BANK LTD( HEREINAFTER CALLED SCBL ) OF RS. 16,68,880/ - AGA INST THE INTEREST INCOME OF RS. 46 , 50 , 337/ - AND THE NET AMOUNT IS OFFERED FOR TAXATION . THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS FIXED DEPOSIT RECEIPT WITH THE SCBL AND AGAINST THE SECURITY OF THESE FDRS, THE ASSESSEE HAS RAISED LOANS OF RS.1.87 CRORES WHICH HAS BEEN GIVEN AS INTEREST FREE LOANS /ADVANCE TO THE TWO COMPANIES, NAMELY, PLACER MERCANTILE AND INVESTMENT PVT. LTD ( HEREINAFTER CALLED PMIPL ) OF RS. 92 LACS AND TO GUFIC PRIVATE LTD. ( HEREAINAFTER CALLED ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 4 | P A G E GPL ) OF RS. 98 LACS . THE ASSES S E E SUBMITTED THAT THE ASSESSEE HAS ITS OWN FDRS OF RS 2 CRORES WITH THE BANK AND ASSESSEE HAS JUST RAISED OVERDRAF T OF RS.1.87 CRORES AGAINST THE SECURITY OF THESE FDRS OF RS 2 CRORES ON WHICH THE ASSESSEE WAS EARNING INTEREST AND INSTEAD OF LIQUIDATING TH E SE FDRS THE ASSES S EE HAS BORROWED THE FUNDS AGAINST THE SECURITY OF THESE FDRS AND HAS LENT THESE MONIES TO ABOVE MENTIONED TWO COMPANIES AS INTEREST FREE LOANS. THE ASSESSEE SUBMITTED THAT IT HAS ITS OWN FUNDS TO THE TUNE OF RS. 12.43 CRORES AND OTHER IN TEREST FREE FUNDS OF RS. 4.30 CRORES AGGREGATING TO RS. 16.73 CRORES AND THE RE IS A PRESUMPTION THAT ASSESSEE HAS GIVEN ITS OWN FUNDS FOR THE PURPOSE OF THESE INTEREST FREE LOANS AS PER THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTI LITIES & POWER LTD. 221 CTR 435 [2009] . THE ASSESSING OFFICER AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE HELD THAT THERE IS A DIRECT NEXUS BETWEEN THE OVERDRAFT OF RS.1.87 CRORES SECURED BY THE ASSESSEE FROM SCBL ON WHICH THE INTEREST IS PAID AND OUT OF WHICH INTEREST FREE FUNDS OF RS.1.90 CRORES ARE RELEASED TO THESE TWO COMPANIES NAMELY PMIPL AND GPL AND HENCE ASSESSEES CONTENTION CANNOT BE ACCEPTED . THE ASSESSING OFFICER RELIED UPON THE DECISION OF HONBLE PUN JAB & HARYANA HIGH COURT IN THE CASE OF CIT V. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H) AND DISALLOWED THE CLAIM OF DEDUCTION OF INTEREST OF RS. 16,68,880/ - ON OVERDRAFT PAID TO THE SCBL U/S 57 OF THE INCOME TAX ACT ,1961 (HEREINAFTER CALLED THE ACT) . ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 5 | P A G E 5 . AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE CIT(A) AND SUBMITTED AS UNDER : T HAT THE ASSESSEE HAD SUFFICIENT OWN FUNDS OF RS. 12.43 CRORES AND INTEREST FREE BORROWING OF RS. 4.09 CRORES (T OTAL 16.73 CRORES) AS AGAINST RS . 13.32 CRORES O F INTEREST FREE INVESTMENTS AND LOANS . THUS, WHERE THERE ARE FUNDS AVAILABLE WHICH ARE INTEREST FREE AND INTEREST BEARING, THEN A PRESUMPTION WOULD ARISE THAT INTEREST WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, PROVIDED TH AT THEY ARE SUFFICIENT TO MEET SUCH INVESTMENTS. THAT THE ASSESSEE HAD DESIRED TO GIVE A SHORT TERM INTEREST FREE LOAN TO THE 2 COMPANIES. HOWEVER, AS THERE WERE NO FUNDS IMMEDIATELY AVAILABLE, AN OVERDRAFT WAS TAKEN SO THAT THERE WOULD BE NO PENAL CHARGE S FOR PRE - MATURE ENCASHMENT OF FD AND ALSO CONTINUE TO EARN HIGH INTEREST RATE. IF THE FD WAS ENCASHED AND THE LOAN WAS GIVEN DIRECTLY, THE ASSESSEE WOULD HAVE NEITHER EARNED INTEREST ON FD NOR PAID INTEREST ON THE OVERDRAFT. THIS SITUATION IS NO DIFFERENT IN THE PRESENT SCENARIO SINCE THE ASSESSEE IS EARNING INTEREST ON FD AND PAYING INTEREST ON OVERDRAFT. OVERALL THE SITUATION IS THE SAME EITHER WAY. MERELY BECAUSE THE ASSESSEE CHOOSES TO MAXIMIZE HIS RETURNS BY ADOPTING ONE OF THE MODES OF CARRYING OUT T HE TRANSACTION, SHE SHOULD NOT BE SADDLED WITH TAX LIABILITIES WHICH ARE HIGHLY DISPROPORTIONATE TO THE POSSIBLE BENEFIT THAT MAY RESULT IN THE LONG RUN. THE ASSESSEE REQUESTS THAT THE ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 6 | P A G E INTERVENING EVENT OF OD MAY BE IGNORED BY DISALLOWING AMOUNT OF INTERES T PAID ON OD WHICH IS HIGHER THAT INTEREST RECEIVED ON FD SO THAT THERE IS NO LOSS TO THE REVENUE. IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO THE ABOVE, SINCE THE ASSESSEE'S ONLY INCOME IS THAT OF INTEREST, SUCH INCOME SHOULD BE TREATED AS INCOME FROM BU SINESS OF MONEY LENDING AND TREATED AS SUCH. CONSEQUENTLY, THE SAME MAY BE ALLOWED AS DEDUCTION AS PER PROVISIONS OF SECTION 36(1)(III) OF THE I. T. ACT. THE ASSESSEE HAS RELIED ON THE FOLLOWING DECISIONS: - (A) CIT VS. RELIANCE UTILITIES & POWER LTD. (2009) 3131TR 340 (B) MUNJAL SALES CORPORATION (2008) 298 ITR 298 (SC) (C) CIT VS. PREM HEAVY ENGINEERING WORKS PVT. LTD. (2006) 285 ITR 554 (ALL) (D) V ISEN INDUSTRIES LTD. VS. ADDL.CI T (2012) 136 ITD 309 (MUM) (E) TORRENT FINANCIERS VS. AC I T (2001) 73 TTJ 624 (AHD) (T) MAHESHWARI HANDLI NG AGENCY P LTD. VS. ACI T (2012) 50 SOT 17 (RAJKOT ) 6. THE CIT(A) HELD THAT THE ASSESSEE HAS RECEIVED INTEREST OF RS. 46,50,337/ - ON ACCOUNT OF INTEREST RECEIVED ON LOAN S , FDRS , SAVINGS ACCOUNT AND GOVER NMENT OF INDIA SAVING BONDS. HE ALSO OBSERVED THAT THE ASSESSEE HAS RECEIVED OVERDRAFT OF RS. 1.87 CRORES FROM SARASWAT COOPERATIVE BANK LTD (SCBL) AN D PAID INTEREST OF RS. 16,68,880/ - ON THE SAID OVERDRAFT . THE ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 7 | P A G E CIT(A) ALSO HELD THAT THE FUNDS AVAILED FRO M THE OVERDRAFT OF RS. 1.87 CRORES FROM THE SCBL WAS GIVEN AS INTEREST FREE LOANS TO PMIPL OF RS. 92 LACS AND TO GPL OF RS. 98 LACS AS INTEREST FREE LOAN FROM WHICH NO INTEREST WAS CHARGED BY THE ASSESSEE ALTHOUGH ON THE OVERDRAFT FROM SCBL THE ASSESSEE HAS PAID RS. 16,68,880/ - WHEREBY THERE WAS A CLEAR AND DIRECT NEXUS OF FUND BEING AVAILED FROM OVERDRAFT FROM SCBL AND SIMULTANEOUSLY RELEASE OF FUNDS AS INTEREST FREE LOAN TO THESE TWO COMPANIES AND HENCE THE PRESUMPTION OF DECISION OF HONBLE BOMBAY HIG H COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA ) IS REBUTTED. HE ALSO HELD THAT THE ASSESSEES OWN FUND ARE INVESTED WITH OTHER FOUR PARTIES FROM WHOM THE INTEREST IS BEING RECEIVED OF RS. 20,55,355/ - AND ASSESSEE HAS ALSO INVESTED ITS OWN FUNDS IN FDR OF RS.2 CRORES WITH SCBL . THE CIT(A) HELD THAT DECISION OF CIT V. ABHISHEK INDUSTRIES LIMITED 286 ITR 1 IS SQUARELY APPLICABLE TO THE CASE OF THE ASSESSEE. THE CIT(A), THEREFORE, UPHELD THE DISALLOWANCE OF CLAIM OF THE DEDUCTION OF INTEREST O F RS.16,68,880/ - PAID BY THE ASSESSEE T O SCBL . 7. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 8 . T HE ASSESSEE CONTENDED BEFORE US THAT INTEREST IS BEING PAID TO SARASWAT COOPERATIVE BANK LTD OF RS. 16,68,880/ - ON THE OVERDRAF T FACILITY AVAILED BY THE ASSESSEE AGAINST THE SECURITY OF FDR OF RS. 2 CRORES ON WHICH INTEREST HAS BEEN EARNED BY THE ASSESSEE AND OFFERED FOR TAXATION. THE ASSESSEE SUBMITTED THAT IT HAS NET TED THE INTEREST INCOME FROM FDR OF ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 8 | P A G E RS.16.14 LACS AS THE INTE REST INCOME IS GENERATED OUT OF FDR ON THE SECURITY OF WHICH THE OVERDRAFT FACILITY IS AVAILED AGAINST WHICH THE INTEREST OF RS.16,68,880/ - IS PAID TO THE SAME BANK. THE ASSESSEE SUBMITTED THAT IF THE ASSESSEE WOULD HAVE DESIRED IT COULD HAVE LIQUIDATED T HE FDRS WITH THE BANK AND SIMPLY RELEASED THE LOANS TO THESE TWO PARTIES NAMELY P MIPL AND GPL AND HENCE THERE WOULD NOT HAVE BE EN ANY INCOME WHICH IS CHARGEABLE TO TAX. THE ASSESSEE SUBMITTED THAT S IMILAR IS THE SITUATION HERE WHEREBY THE INTEREST INCOME OF RS.16.14 LACS IS EARNED ON THE FDR FROM THE BANK AND THE INTEREST OF RS.16.69 LACS IS PAID BACK TO THE SAME BANK ON THE OVERDRAFT FACILITY OF RS 1.87 CRORES AVAILED FROM THE SAME BANK AGAINST THE SECURITY OF FDR S OF RS 2 CRORES AND HENCE NETTING OF THE INTEREST SHOULD BE ALLOWED FOR CHARGING THE SAME TO TAXATION . THE ASSESSEE REFERRED TO THE PROVISIONS OF SECTION 57 (III) OF THE ACT AND STATED THAT SECTION 57 (III) OF THE ACT ITSELF STIPULATES THAT ANY EXPENDITURE INCURRED TO EARN AN INCOME CHARGEABLE TO TAX U/S 56 OF THE ACT SHALL BE ALLOWED AS DEDUCTION U/S 57 (III) OF THE ACT. HE ALSO SUBMITTED THAT THE ASSESSEE HAS ITS OWN SUFFIC IENT FUNDS OF RS 12.43 CRORES AND FURTHER THERE ARE INTEREST FREE BORROWINGS OF RS 4.30 CRORES AS RE FLECTED IN THE BALANCE S HEET WHICH LEADS TO THE PRESUMPTION AS PER THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA) THAT THESE INTEREST FREE LOANS OF RS 92 LACS TO PMIPL AND RS 98 LACS TO GPL ARE OUT OF OWN F UNDS . THE A SSESSEE SUBMITTED THAT IT HAS GIVEN INTEREST FREE LOANS TO THE AFORE - MENTIONED PARTIES AND IN ONE COMPANY ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 9 | P A G E I.E. GPL , THE ASSESSEE IS DIRECTOR AND HENCE LOANS ARE GRANTED DUE TO COMMERCIAL EXPEDIENCY . HE RELIED UPON THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF CIT VS. AC G ASSOCIATED CAPSULES [18 TAXMANN.COM 137]. HE ALSO RELIED UPON THE DECISION OF THE TRIBUNAL IN THE CASE OF RAJ KUMARI AGARWAL V. DCIT IN ITA NO 176/AGRA/2013(AGRA TRIB.). AS AN ALTERNATIVE PLEA , T HE ASSESSEE FURTHER SUBMI TTED THAT SINCE THE ASSESSEE IS A DIRECTOR IN ONE OF THE COMPANIES IE GPL , THE INTEREST FREE LOAN OF RS.98 LACS GRANTED IS A BUSINESS DECISION, THE INTEREST PAID TO THE BANK TO THE EXTENT ATTRIBUTABLE TO THE ADVANCE TO GPL SHOULD BE ALLOWED AS DEDUCTION U/S 36(1)(III) OF THE ACT . 9 . LD. DR ON THE OTHER HAND, SUBMITTED THAT SECTION 57 (III) OF THE ACT CAN ONLY BE INVOKED WHERE THE EXPENDITURE (OTHER THAN CAPITAL EXPENDITURE) IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME AND NOT VICE VERSA . THE LD DR STATED THAT FACTS OF THE PRESENT CASE ARE DIFFERENT. HE STATED THAT I N THE CASE IN HAND, THE INTEREST IS EARNED ON THE FDR AND THE SAID FDRS ARE USED BY THE ASSESSEE FOR THE PURPOSE OF A VAILING THE OVERDRAFT FACILIT Y ON WHICH THE INTEREST IS EXPENDED AND HENCE THE INTEREST IS NOT EXPENDED FOR THE PURPOSE OF EARNING INCOME RATHER IT IS VICE VERSA AND HENCE NETTING OF INTEREST CANNOT BE DONE AS HAS BEEN DONE BY THE ASSESSEE IN THE RETURN OF INCOME FILED WITH REVENUE . T HE LD DR CONTENDED THAT THE ASSESSEE HAS DIVERTED THE INTEREST BEARIN G FUNDS ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 10 | P A G E SECURED AS OVERDRAFT FROM SCBL FOR NON BUSINESS PURPOSES TO THESE COMPANIES IE PMIPL AND GPL FREE OF INTEREST. T HE LD DR CONTENDED THAT THE ASSESSING OFFICER HAS RIGHTLY MADE TH E DISALLOWANCE WHICH IS CONFIRMED BY THE CIT(A). HE ALSO STATED THAT AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. V. GOPINATHAN [ (2001) 248 ITR 449], WHEREBY THE HONBLE SUPREME COURT HAS CLEARLY HELD THAT EXPENDITURE CAN ONLY BE ALL OWED U/S 57 (III) OF THE ACT , IF THE SAME IS EXPENDED TO EARN THE INCOME AND NOT VICE - VERSA AS THERE IS NO PROVISIONS UNDER THE ACT FOR ALLOWING SO AND THE INTEREST SO GENERATED ON TERM DEPOSIT HAS TO BE OFFERED FOR TAXATION WITHOUT ADJUSTING INTEREST PAID ON BORROWING AGAINST THE SAID TERM DEPOSITS . LD. DR FURTHER CONTENDED THAT THE DECISION OF H ONBLE SUPREM E COURT IN THE CASE OF AC G ASSOCIATED CAPSULES (SUPRA), RELIED UPON BY THE ASSESSEE IS NOT APPLICABLE TO THE FACTS OF PRESENT CASE AS THE DECISION IS RELEVANT AND APPLICABLE ONLY FOR COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT AND NOT FOR THE PURPOSE OF SECTION 56 AND 57 OF THE ACT. HE ALSO STATED THAT ASSESSEE HAS ONLY MAD E BALD STATEMENT WHICH IS MADE FOR THE FIRST TIME BEFORE TRIBUNAL THAT SHE HA S GIVEN FUNDS FOR THE PURPOSE OF BUSINESS AS A MEASURE OF COMMERCIAL EXPEDIENCY AS HELD BY THE HONBL E SUPREME COURT IN THE CASE OF CIT V. SA BUILDERS (2007) 288 ITR 1 SC , AS SHE IS A DIRECTOR IN GPL WHILE THIS FACT HAS NOT BEEN VERIFIED BY THE AUTHORITIES BELOW. 1 0 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE RELEVANT MATERIAL ON RECORD AS WELL THE CASE LAWS RELIED BY RIVAL ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 11 | P A G E PARTIES . AFTER CONSIDERING THE PROVISIONS OF SECTION 56 AND 57 OF THE ACT AND ALSO THE DECISIONS RELIED UPON BY BOTH THE PARTIES, WE HOLD THAT THE EXPENDITURE (OTHER THAN CAPITAL EXPENDITURE) SHALL BE ALLOWABLE ONLY IF IT IS INCURRED FOR THE PURPOSE OF EARNING INCOME AND NOT VICE - VERSA AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. . V. GOPINATHAN (SUPRA) . HENCE AS PER RATIO OF HONBLE SUPREME COURT DECISION IN V GOPINATHAN (SUPRA) CASE, THE NETTING OF INTEREST EXPENDITURE AGAINST INTEREST INCOME FROM FDR CANNOT BE ALLOWED AS THE EXPENDITURE OF INTEREST INCURRED BY THE ASSESSEE IS NOT WHOLLY AND EXCLUSI VELY LAID OUT OR EXPENDED FOR MAKING OR EARNING INCOME AS PER MANDATE OF SECTION 57(III) OF THE ACT RATHER IT IS VICE VERSA . AT THIS JUNCTURE, IT IS APT TO REFER SECTION 57(III) OF THE ACT, WHICH READS AS UNDER : 'SEC. 57 : THE INCOME CHARGEABLE UNDER TH E HEAD 'INCOME FROM OTHER SOURCES' SHALL BE COMPUTED AFTER MAKING THE FOLLOWING DEDUCTIONS, NAMELY : (I) TO (II) (III) ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAK ING OR EARNING SUCH INCOME.' THE ASSESSEE HAS TAKEN FDR OF RS.2 CRORES ON WHICH THE ASSESSEE HAS EARNED INTEREST INCOME OF RS.16.14 LACS , THE ASSESSEE HAS AVAILED OVERDRAFT TO THE ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 12 | P A G E TUNE OF RS 1.87 CRORES FROM SCBL ON THE SECURITY OF FDR OF RS 2 CRORES O N WHICH INTEREST OF RS 16,68,880 HAS BEEN PAID TO SCBL. THE SAID AMOUNT SO OVERDRAWN FROM SCBL OF RS 1.87 CRORES IS DIRECTLY UTILIZED BY THE ASSESSEE TO GIVE INTEREST FREE LOANS OF RS 98 LACS TO PMIPL AND RS 92 LACS TO GFL, THUS REVENUE HAS PROVED DIRECT N EXUS OF GRANT OF INTEREST FREE LOANS OUT OF INTEREST BEARING OVERDRAWN AMOUNT FROM SCBL AND THE RELIANCE OF THE ASSESSEE ON THE CASE OF RELIANCE UTILITIES AND POWER LIMITED (SUPRA ) IS MISCONCEIVED AS THE PRESUMPTION THEREIN IS REBUTTED. THE ASSESSEE HAS R AISED THE PLEA FOR THE FIRST TIME BEFORE US THAT SHE HAS GIVEN THE INTEREST FREE LOAN OF RS. 98 LACS TO GPL AS A MEASURE OF COMMERCIAL EXPEDIENCY BECAUSE SHE IS TH E DIRECTOR OF THE SAID COMPANY. HOWEVER THE SAID PLEA HAS NOT BEEN VERIFIED BY THE AUTHORITIES BELOW. WE, THEREFORE, HOLD THAT TO THE EXTENT OF BORROWING MADE FROM SCBL FOR LENDING TO GPL OF RS. 98 LAC S , THE INTEREST ATTRIBUTABLE THEREOF PAID TO SCBL SHALL BE ALLOWABLE TO BE SET OFF AGAINST THE INTEREST INCOME IF THE ASSESSEE IS ABLE TO PROVE BEFORE THE ASSESSING OFFICER THAT THE SAID INTEREST FREE LOAN OF RS. 98 LACS GIVEN TO GPL HAS BEEN GIVEN AS A MEASURE OF COMMERCIAL EXPEDIENCY AS HELD BY THE HONBLE SUPREME COURT IT THE CASE OF S.A BUILDERS (SUPRA) AND HENCE TO THAT EXTENT WE AL LOW THE APPEAL SUBJECT TO VERIFICATION BY THE ASSESSING OFFICER AND ACCORDINGLY SET ASIDE THE MATTER TO THE FILE OF ASSESSING OFFICER FOR NECESSARY VERIFICATION AS DETAILED ABOVE AND THE ASSESSEE WILL BE GIVEN PROPER AND ADEQUATE OPPORTUNITY IN ACCORDANCE WITH THE PRINCIPLES OF ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 13 | P A G E NATURAL JUSTICE . RELEVANT EXTRACTS FROM THE DECISION OF HONBLE SUPREME COURT DECISION IN S A BUILDERS LIMITED (SUPRA) ARE EXTRACTED BELOW FOR READY REFERENCE : 16. WE HAVE CONSIDERED THE SUBMISSIONS OF THE RESPECTIVE PARTIES. THE QUESTION INVOLVED IN THIS CASE IS ONLY ABOUT THE ALLOW ABILITY OF THE INTEREST ON BORROWED FUNDS AND HENCE WE ARE DEALING ONLY WITH THAT QUESTION. IN OUR OPINION, THE APPROACH OF THE HIGH COURT AS WELL AS THE AUTHORITIES BELOW ON THE AFORESAID QUESTION WA S NOT CORRECT. 17. IN THIS CONNECTION WE MAY REFER TO SECTION 36(L)(III) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE 'ACT') WHICH STATES THAT 'THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS O R PROFESSION' HAS TO BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME - TAX UNDER SECTION 28 OF THE ACT. 18. IN MADHAV PRASAD JATIA V. CIT AIR 1979 SC 1291, THIS COURT HELD THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVISION IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS', AND THIS HAS BEEN THE CONSISTENT VIEW OF THIS COURT. 19. IN OUR OPINION, THE HIGH COURT IN THE IMPUGNED JUDGMENT, AS WELL AS THE TRIBUNAL AND THE IT AUTHORITIES HAVE APPROACHED THE MATTER FROM AN ERRONEOUS ANGLE. IN THE PRESENT CASE, THE ASSESSEE BORROWED THE FUND FROM THE BANK AND LENT SOME OF IT TO ITS SISTER - CONCERN (A SUBSIDIARY) ON INTEREST - FREE LOAN. THE TEST, IN OUR OPINION, IN SUCH A CASE IS REALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. 20. IN OUR OPINION, THE DECISIONS RELATING TO SECTION 37 OF THE ACT WILL ALSO BE APPLICABLE TO SECTION 36(L)(III) BECAUSE IN SECTION 37 ALSO THE EXPRESSION USED IS 'FOR THE PURPOSE OF BUSINESS'. IT HAS BEEN CONSISTENTLY HELD IN DECISIONS RELATING TO SECTION 37 THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. 21. THUS IN ATHERTON V . BRITISH INSULATED & HELSHY CABLES LTD. (1925) 10 TAX CASES 155 (HL), IT WAS HELD BY THE HOUSE OF LORDS THAT IN ORDER TO CLAIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MONEY IS EXPENDED, NOT OF NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE BENEFIT, BUT VOLUNTARILY AND ON GROUNDS OF ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 14 | P A G E COMMERCIAL EXPEDIENCY AND IN ORDER TO INDIRECTLY FACILITATE THE CARRYING ON THE BUSINESS. THE ABOVE TEST IN ATHERTON'S CASE (SUPRA) HAS BEEN APPROVED BY THIS COURT IN SEVERAL DECISIONS E.G. EASTERN INVESTMENTS LTD. V. CIT (1951) 20 ITR 1 (SC), CIT V. CHANDULAL KESHAVLAL & CO. (1960) 38 ITR 601 (SC) ETC. 22. IN OUR OPINION, THE HIGH COURT AS WELL AS THE TRIBUNAL AND OTHER IT AUTHORITIES SHOULD HAVE APPROACHED THE QUESTION OF ALLOW ABILITY OF INTEREST ON THE BORROWED FUNDS FR OM THE ABOVE ANGLE. IN OTHER WORDS, THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE ENQUIRED AS TO WHETHER THE INTEREST - FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS A SUBSIDIARY OF THE ASSESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAVE BEEN ALLOWED . 23. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL O BLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 24. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT (SUPRA), IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENTIMENTAL OR PERSONAL REASONS AN D NOT ON THE GROUND OF COMMERCIAL EXPEDIENCY, THE INTEREST THEREON COULD NOT HAVE BEEN ALLOWED UNDER SECTION 36(L)(III) OF THE ACT . IN MADHAV PRASAD'S CASE (SUPRA), THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIEW TO COMMEMORATE THE MEMORY OF THE A SSESSEE'S DECEASED HUSBAND AFTER WHOM THE COLLEGE WAS TO BE NAMED. IT WAS HELD BY THIS 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 EXPEDIENCY. THUS, THE RATIO OF MADHA V. PRASAD JATIA'S CASE (SUPRA) IS THAT THE BORROWED FUND ADVANCED TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECTION 36(L)(III) OF THE ACT. 25 . 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. 26. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXPRESSION 'FO R THE PURPOSE OF EARNING PROFITS' VIDE CIT V. MALAYALAM PLANTATIONS LTD. (1964) 53 ITR 140 (SC), CIT V. BIRLA COTTON SPINNING & WEAVING MILLS LTD. (1971) 82 ITR 166 (SC), ETC. ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 15 | P A G E 27. THE HIGH COURT AND THE OTHER AUTHORITIES SHOULD HAVE EXAMINED THE PURPOSE FO R WHICH THE ASSESSEE ADVANCED THE MONEY TO ITS SISTER - CONCERN, AND WHAT THE SISTER - CONCERN DID WITH THIS MONEY, IN ORDER TO DECIDE WHETHER IT WAS FOR COMMERCIAL EXPEDIENCY, BUT THAT HAS NOT BEEN DONE. 28. IT IS TRUE THAT THE BORROWED AMOUNT IN QUESTION WAS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS, BUT HAD BEEN ADVANCED AS INTEREST - FREE LOAN TO ITS SISTER - CONCERN. HOWEVER, IN OUR OPINION, THAT FACT IS NOT REALLY RELEVANT. WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUCH AMOUNT TO ITS SISTER - CON CERN AS A MEASURE OF COMMERCIAL EXPEDIENCY. 29. LEARNED COUNSEL FOR THE REVENUE RELIED ON A BOMBAY HIGH COURT DECISION IN PHALTAN SUGAR WORKS LTD. V. CIT (1994) 208 ITR 989 (BOM) IN WHICH IT WAS HELD THAT DEDUCTION UNDER SECTION 36(L)(III) CAN ONLY BE ALLO WED ON THE INTEREST IF THE ASSESSEE BORROWS CAPITAL FOR ITS OWN BUSINESS. HENCE, IT WAS HELD THAT INTEREST ON THE BORROWED AMOUNT COULD NOT BE ALLOWED IF SUCH AMOUNT HAD BEEN ADVANCED TO A SUBSIDIARY COMPANY OF THE ASSESSEE. WITH RESPECT, WE ARE OF THE OPI NION THAT THE VIEW TAKEN BY THE BOMBAY HIGH COURT WAS NOT CORRECT. THE CORRECT VIEW IN OUR OPINION WAS WHETHER THE AMOUNT ADVANCED TO THE SUBSIDIARY OR ASSOCIATED COMPANY OR ANY OTHER PARTY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. WE ARE OF THE OPINION THAT THE VIEW TAKEN BY THE TRIBUNAL IN PHALTAN SUGAR WORKS LTD. (SUPRA) THAT THE INTEREST WAS DEDUCTIBLE AS THE AMOUNT WAS ADVANCED TO THE SUBSIDIARY COMPANY AS A MEASURE OF COMMERCIAL EXPEDIENCY IS THE CORRECT VIEW, AND THE VIEW TAKEN BY THE BOMBA Y HIGH COURT WHICH SET ASIDE THE AFORESAID DECISION IS NOT CORRECT. 30. SIMILARLY, THE VIEW TAKEN BY THE BOMBAY HIGH COURT IN PHALTAN SUGAR WORKS LTD. V. CIT (1995) 215 ITR 582 (BOM) ALSO DOES NOT APPEAR TO BE CORRECT. 31. WE AGREE WITH THE VIEW TAKEN BY T HE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (BHARAT) LTD. (2002) 254 ITR 377 (DEL) THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESS MAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT. THE IT AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDENT BUSINES SMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 16 | P A G E 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 FOR EARNING PROFITS. 32 . WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINION 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 CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SIS TER - CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY . HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER - CONCERN FOR COMM ERCIAL 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 HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE S AME 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 LOANS. HOWEVER, THE INTEREST EXPENDITURE PAID TO SCBL AND ATTRIBUTABLE TO THE ADVANCE OF RS. 92 LAC S GIVEN TO PMIPL SHALL NOT BE ALLOWED AS EXPENDITURE TO BE SET OFF AGAINST THE INTEREST INCOME FROM FDR AS PER REASONING GIVEN BY US ABOVE AND HENCE THE CONTENTION OF THE ASSESSE E TO THIS EXTENT IS REJECTED. WE ORDER ACCORDINGLY. 12. IN THE RESULT APPE AL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 2 8 T H DAY OF SEPTEMBER 2015. S D / - S D / - (SHAILENDRA KUMAR YADAV) ( RAMIT KOCHAR ) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) MUMBAI DATED 2 8 - 09 - 2015 SKS SR. P.S ITA NO 215/MUM/2013 ASSESSMENT YEAR: - 2009 - 10 17 | P A G E COPY TO: THE APPELLANT THE RESPONDENT THE CONCERNED CIT(A) THE CONCERNED CIT THE DR, G BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI