DCIT, Thiruvalla V. Sri.George Thomas, Kozhencherry

ITA 273/COCH/2014

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7685 (ITAT-COCHIN)
• Duration Of Justice: 8 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2022
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 12-06-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Set aside

Judgement Text

ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry IN THE INCOME TAX APPELLATE TRIBUNAL BENCH: COCHIN BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.273/Coch/2014 Assessment Year: 2007-08 Deputy Commissioner of Income-tax Circle-1 Thiruvalla Vs. Shri George Thomas Muthoot House Kozhencherry 689 641 PAN NO : ACKPG5848G APPELLANT RESPONDENT Appellant by : Smt. J.M. Jamuna Devi, Sr D.R. Respondent by : Shri R. Sreenivasan, A.R. Date of Hearing : 13.09.2022 Date of Pronouncement : 13.09.2022 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by revenue is directed against order of CIT(A) for the assessment year 2007-08 dated 5.2.2014. Originally revenue came in appeal before this Tribunal in ITA Nos.271 to 273/Coch/2014. ITA Nos.271 & 272/Coch/2014 were disposed of by this Tribunal vide order dated 12.2.2015 by observing as under: “6. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the provisions of section 57(iii) of the act. Provisions of section 57(iii) clearly says that the expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry Page 2 of 8 alone has to be allowed as deduction while computing the taxable income. Therefore, it is for the assessee to establish that the interest paid to Muthoot Builders and Muthoot Medical Centre is for the purpose of earning interest income from Mutuhoot Finance Pvt Ltd. In other words, the assessees have to establish the nexus between the withdrawals from Muthoot Builders and Muthoot Medical Centre and investment in Muthoot Finance Pvt Ltd. In the cases before us, there is no material available on record to suggest that the money withdrawn from Muthoot Builders and Muthoot Medical Centre was invested in Muthoot finance Pvt Ltd for earning the interest income. The CIT(A) without verifying the details has simply allowed the claim of the assessee. Moreover, withdrawal was made from Muthoot Builders and Muthoot Medical Centre upto to the assessment year under consideration. It is not known how the money withdrawn upto the assessment year under consideration was available for investment in the assessment year 200304. Since the Id. representative for the assessee prays for an opportunity to place necessary material before the assessing officer to establish the nexus between the withdrawal and the investment, this Tribunal is of the considered opinion that giving such an opportunity may not prejudice the interest of revenue in any way. Accordingly, the orders of lower authorities are set aside and the issue is remitted back to the file of the assessing officer. The assessing officer shall re- examine the issue afresh on the basis of the material that may be produced by the assessee and examine whether there was any nexus between the money said to be withdrawn from Muthoot Builders and Muthoot Medical Centre and the investment made in Muthoot Finance Pvt Ltd. The assessing officer shall thereafter decide the issue afresh in accordance with law after giving reasonable opportunity of hearing to the assessee. 7. In the result, both the appeals of the assessee are allowed for statistical purpose.” 2. The appeal No.273/Coch/2014 has been left out. Hence, this appeal came for hearing before this bench on 13.9.2022. The grounds in this appeal are as follows:- ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry Page 3 of 8 “The order of the learned Commissioner of Income tax (Appeals), Trivandrum, in so far as the points stated below are concerned, is opposed to law on the facts and in the circumstances of the case. 2. The Lei. Commissioner of Income Tax (Appeals) has erred in holding that the interest expense (Rs. 1,12,50,000/ -) claimed by the assessee under the head "income from other sources" qualifies for deduction u/s 57(iii) of the Act. The assessee's claim was that funds drawn from the firm in which he is a partner (M/s. Muthoot Medical Centre) were invested in M/s. Muthoot Finance Ltd and hence, the interest paid to the firm from the interest received from M/s. Muthoot Finance Ltd was allowable as deduction u/s 57(iii) of the Act. 4. The disallowance was made by the Assessing Officer mainly on the finding that the investment in Muthoot Finance (P) Ltd. was made by the assessee in FY 2002-03. In the relevant year, the assessee had not drawn funds from the firm as evidenced by the partner's drawing account produced before the AO. Therefore, there was no real nexus between the interest earned on investments and the interest paid on drawings. 5. The Ld. CIT (A) has overlooked the fact that an expenditure claimed as a deduction against interest income needs to be one that is expended "wholly and exclusively" for the purpose of earning the interest income. The phrase "wholly and exclusively" calls for a direct nexus between the income and the expenditure. Here, the assessee has not been able to establish a direct nexus between the borrowal from the firm and the investment in the company. 6. The Ld. CIT (A) ought to have considered that the total income returned by the assessee for the AY 2007-08 itself was Rs. 4,42,18,200/- and hence, there can be no doubt on the fact that the assessee had both interest free own funds as well as interest bearing funds at his disposal. It is quite possible that own funds were also used for investment. 7. In the case of CIT Vs Reliance Utilities [2009] (313 ITR 340 (BOM), the Hon'ble Bombay High Court has held that when the assessee has both interest bearing funds and interest free funds at his disposal, presumption would arise that investment were out of interest free funds. 8. Even otherwise, the onus is squarely on the assessee to prove that interest bearing funds alone were utilized for the purpose of investment. From the phrase "wholly and exclusively" used in the Act, it is clear that a direct nexus needs to be established between the income and the expenditure. 9. The Ld. CIT (A) ought to have also noted that in the instant case, the advancement of loans by the firm to the partner as well as the investment by the partner are mere book entries without any physical transfer of - funds.” ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry Page 4 of 8 3. Facts of the case are that by order dated 30.12.2010 and served on the assessee on 3.1.2011, the Deputy Commissioner of Income Tax, Circle-1, Thiruvalla has completed the assessment of the assessee for the assessment years 2007-08 as under:- Year Income Returned (Rs.) Income Assessed. (Rs.) 1 2007-08 4,42,18,200 5,56,96,335 3.1 In this A.Y. addition has been made in the form of denial of interest paid by the assessee to the firm Muthoot Medical Centre on the loans taken from the firm in which he is a partner. In each of the order, addition on this score is of a sum of Rs. 1,12,50,000/-. Apart from the above interest, for the year 2007-08 paid on gold loan to the tune of Rs. 1,38,813/- also was denied. 3.2 The facts are that the assessee is a partner in the firm Mar Gregarious Memorial Muthoot Medical Centre, Kozhenchery. He has drawn amount from the firm under debit to his capital account and invested such amount in the company namely Muthoot Finance Private Ltd. in which he is the Director. The assessee had earned interest from the company out of which interest has been paid to the firm. Such interest paid has been claimed as a deduction under other sources. According to the AO as per section 57 (III) expenses incurred only and exclusively for earning income can be claimed as expense under the head income from other sources, since there is no nexus between the interest received from Muthoot Finance Ltd. and interest paid to Muthoot Medical Centre claim for deduction is incorrect. ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry Page 5 of 8 4. After hearing both the parties, we are of the opinion that similar issue was considered by this Tribunal in assessee’s own case in ITA No.272/Coch/2014 for the A.Y. 2006-07. The Tribunal vide combined order in the case of George Jacob in ITA No.271/Coch/2014 and in ITA No.272/Coch/2014 in assessee’s own case vide order dated 12.2.2015, which reads as follows:- 1. Both the appeals of the revenue relates to two independent assessees and directed against the respective orders of CIT(A). Since common issue arises for consideration, both the appeals were heard together and are disposed of by this common order. 2. Shri K.K. John, the Id.DR submitted that the assessee, Shri George Jacob in ITA No.271/Coch/2014 paid interest to the extent of Rs.2,95,55,947 to partnership firms Muthoot Builders and Muthoot Medical Centre. According to the Id.DR, the assessee has also received interest of Rs.3,54,03,255 from Muthoot Finance Ltd. The assessee claimed before the assessing officer that the payment of interest to the extent of Rs. 2,95,55,947 to Muthoot Builders and Muthoot Medical Centre is only for the purpose of earning interest to the extent of Rs.3,54,03,255. Therefore, the interest paid to Muthoot Builders and Muthoot Medical Centre has to be deducted. However, the assessing officer found that the investment in Muthoot Finance Pvt Ltd was made during the financial year 2002-03 relevant to assessment year 2003-04. The assessee has been drawing funds on various dates from Muthoot Builders and Muthoot Medical Centre upto the previous year relevant to the assessment year under consideration. Therefore, the money withdrawn from Muthoot Builders and Muthoot Medical Centre after the financial year 2002-03 might not have invested in Muthoot Finance Pvt Ltd. Therefore, according to the Id.DR, there was no nexus between the interest income earned on the investment mad with Muthoot Finance Pvt. Ltd. However, the CIT(A) allowed the claim of the assessee without verifying the nexus between the money drawn from Muthoot Builders and Muthoot Medical Centre and investment in Muthoot Finance Pvt Ltd allowed the claim of the assessee. The Id.DR further submitted that the profit of the assessee for the year under consideration is Rs.3,26,37,655. Therefore, the presumption is that the assessee used its own money for making investment, if any. ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry Page 6 of 8 3. Similarly, in the case of George Thomas in ITA No.272/Coch/2014, the assessee received interest of Rs.1,62,53,260 from Muthoot Finance Pvt Ltd and paid interest to Muthoot Builders and Muthoot Medical Centre to the extent of Rs.1,12,50,000. The CIT(A) allowed the claim of the assessee without verifying the nexus between the withdrawal from Muthoot Builders and Muthoot Medical Centre and the investment made in Muthoot Finance Pvt Ltd. 4.According to the Id.DR, the expenditure incurred wholly and exclusively for the purpose of earning the income alone has to be allowed while computing the taxable income. It is for the assessee, according to the Id. DR, to explain how the interest paid to Muthoot Builders and Muthoot Medical Centre was for the purpose of earning the interest income from Muthoot finance Pvt Ltd. The so-called investment with Muthoot Finance Pvt. Ltd. could not have been made with the money withdrawn from Muthoot Builders and Muthoot Medical Centre as the money was invested in Muthoot Finance Pvt Ltd in the financial year 2002-03 relevant to the assessment year 2003-04. Therefore, in the absence of any proper explanation, according to the Ld. DR, the CIT(A) is not justified in allowing the claim of the assessee. 5. On the contrary, Shri R Srinivasan, the Ld. representative for the assessee submitted that the money withdrawn from Muthoot Builders and Muthoot Medical Centre in which the assessees are partners was used for making investment with Muthoot Finance Pvt Ltd. Therefore, the interest earned from such investment from Muthoot Finance Pvt Ltd has to be set off with the interest paid to Muthoot Builders and Muthoot Medical Centre. The Ld. representative submitted that an opportunity may be given to the assessee to produce the necessary material to establish the nexus between the withdrawal and the investment by remitting back the matter to the assessing officer. The Id representative submitted that the assessees would produce all the necessary details before the assessing officer. 6. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the provisions of section 57(iii) of the act. Provisions of section 57(iii) clearly says that the expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income alone has to be allowed as deduction while computing the taxable income. Therefore, it is for the assessee to establish that the interest paid to Muthoot Builders and Muthoot Medical Centre is for the purpose of earning interest income from Mutuhoot Finance Pvt Ltd. In other words, the assessees have to ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry Page 7 of 8 establish the nexus between the withdrawals from Muthoot Builders and Muthoot Medical Centre and investment in Muthoot Finance Pvt Ltd. In the cases before us, there is no material available on record to suggest that the money withdrawn from Muthoot Builders and Muthoot Medical Centre was invested in Muthoot finance Pvt Ltd for earning the interest income. The CIT(A) without verifying the details has simply allowed the claim of the assessee. Moreover, withdrawal was made from Muthoot Builders and Muthoot Medical Centre upto to the assessment year under consideration. It is not known how the money withdrawn upto the assessment year under consideration was available for investment in the assessment year 200304. Since the Id. representative for the assessee prays for an opportunity to place necessary material before the assessing officer to establish the nexus between the withdrawal and the investment, this Tribunal is of the considered opinion that giving such an opportunity may not prejudice the interest of revenue in any way. Accordingly, the orders of lower authorities are set aside and the issue is remitted back to the file of the assessing officer. The assessing officer shall re-examine the issue afresh on the basis of the material that may be produced by the assessee and examine whether there was any nexus between the money said to be withdrawn from Muthoot Builders and Muthoot Medical Centre and the investment made in Muthoot Finance Pvt Ltd. The assessing officer shall thereafter decide the issue afresh in accordance with law after giving reasonable opportunity of hearing to the assessee. 7. In the result, both the appeals of the assessee are allowed for statistical purpose.” 5. Respectfully following the above order of the Tribunal, we remit this issue to the file of AO on similar directions. 6. In the result, the appeal filed by the revenue is partly allowed for statistical purposes. Order pronounced in the open court on 13 th Sept, 2022 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 13 th Sept, 2022. VG/SPS ITA No.273/Coch/2021 Shri George Thomas, Kozhencherry Page 8 of 8 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.