Rajesh Shantilal Sanghvi, Ahmedabad V. The Dy. Commissioner of Income Tax, Circle-2(2), Ahmedabad

ITA 37/AHD/2023

AI Insights

The case involves Rajesh Shantilal Sanghvi, the appellant, contesting the disallowance of interest expenditure claimed under Section 57(iii) of the Income Tax Act, 1961, for the Assessment Year 2013-14. The assessee had declared an income from other sources and claimed a deduction for interest expenses. The Assessing Officer disallowed a portion of these expenses, which was upheld by the CIT(A) and contested in this appeal. The main legal contention was whether the interest expenses were wholly and exclusively incurred for the purpose of earning income from other sources, as required under Section 57(iii). The Tribunal found that the assessee did not sufficiently establish the nexus for the disallowed amount and thus upheld the disallowance.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 129380 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 22-05-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 17-01-2023
• Other Referred Cases: Addl. CIT Vs Laxmi Agents Pvt Limited (115 ITR 227)(Guj)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Section: 28; 250; 143(2)

Judgement Text

ITA No.37/Ahd/2023 Assessment Year: 2013-14 Page 1 of 6 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH, AHMEDABAD BEFORE Ms. SUCHITRA KAMBLE, JUDICIAL MEMBER ITA No.37/Ahd/2023 Assessment Year: 2013-14 Rajesh Shantilal Sanghvi, vs. Dy. Commissioner of Income Tax, 54, Hindu Colony Society, Circle 2(2), Ahmedabad. Opp.Sardar Patel Stadium, Navrangpura, Ahmedabad. [PAN – ACIPS 6389 N] (Appellant) (Respondent) Assessee by : Shri P.D. Shah, AR Revenue by : Shri Atul Pandey, Sr. DR Date of hearing : 23.05.2023 Date of pronouncement : 26.05.2023 O R D E R This appeal is filed by the Assessee against order dated 13.12.2022 passed by the CIT(A)-11, Ahmedabad for the Assessment Year 2013-14. 2. The Assessee has raised the following grounds of appeal :- “1. That the notice issued under section 143(2) of the Act and subsequent proceeding is bad in law and against the entire set of the facts of the case and therefore the assessment order passed by the learned AO is required to be quashed and therefore the ld. AO be directed to accept the returned income or delete the addition made in the assessment order. 2. That the learned CIT (Appeals), has erred in law and facts by confirming the disallowance of interest expenditure of Rs.16,37,358/- under section 57 of the Act, on the ground that the assessee has failed to discharge the onus to furnish the justification/explain to claim interest paid u/s.57 of the Income tax Act, therefore learned AO should be directed to allow the said claim, while computing the total income.” 3. The assessee filed return of income on 29.09.2013 declaring total income at Rs.32,08,310/-. The case was selected for scrutiny and notice under Section 143(2) of the Income Tax Act, 1961 was issued and duly served upon the assessee. The assessee submitted copy of return alongwith Audit Report, Balance Sheet, Profit & Loss account etc. The Assessing Officer observed that the assessee has shown ITA No.37/Ahd/2023 Assessment Year: 2013-14 Page 2 of 6 income from other sources at Rs.27,04,477/- and has claimed deduction of Rs.40,00,000/- under Section 57 and thereby loss under the head other sources was shown as Rs.12,95,523/-. The same was set off by the assessee against income from salary. The assessee was called for explanation most specifically to establish the nexus between the loans taken and advances made vis-à-vis interest paid and interest earned and justify his claim of deduction under Section 57 of the Act. The assessee filed details. The Assessing Officer observed that against the interest income of Rs.27,04,447/-, the assessee only managed to show that interest expenditure to the extent of Rs.23,62,642/- only was expended wholly and exclusively for the purpose of earning such interest income. For the remaining amount of Rs.16,37,358/-, the assessee could not explain the nexus and explain that this amount was expended wholly and exclusively for earning income from other source so as to qualify as deduction under Section 57 of the Act. Thus, the Assessing Officer made disallowance of Rs.16,37,358/-. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee. 5. Ground no.1 is not pressed by the Ld. AR during the hearing and hence ground no.1 is dismissed. 6. As regards to ground no.2 related to disallowance of interest expenses, the Ld. AR filed following submissions:- 1. That the learned AO and CIT(A) has not properly considered the facts of the case and against the interest income of Rs.27,04,477/-, interest expenses of Rs.23,62,642/- has been allowed under section 57(iii) of the Act. The amount of Rs.23,62,642/- has allowed against the claim of interest of Rs.40 Lacs, under section 57(iii) and the balance amount of Rs 16,37,358/-has been disallowed, holding that the said amount is not for earning income. 2. In this regard it is submitted that against the total interest expenses for the year under consideration is of Rs.92,42,098/-, on the basis of the following after establishing the direct nexus, Rs.40 Lacs (Rounded amount of Rs.40,01,367/- Refer Page No.5 of the paper book), has been claimed under section 57(iii) of the Act:- ITA No.37/Ahd/2023 Assessment Year: 2013-14 Page 3 of 6 Particulars Rs. Interest Income-Under the head-Income from other Sources 2704447 Partnership Interest Income-Section 28(v) 728883 Total Interest Income earned (A) 3433330 Capital Gain Earned 109940 Total Income earned (B) 3543270 Interest expenses Claimed under section 57(iii) 4000000 Interest expenses for contribution in Partnership Firm-Disha Realtors 732507 Total Effective Interest expenses (C) 3267493 Net Interest Earned out of interest expenses (A-C) 165837 Net Income Earned out of interest expenses (B-C) 275777 3. In view of the above facts, the interest expenses is for earning of income and mere claim of entire interest expenses under the head income from the other sources cannot be basis for the disallowance under section 57(iii) of the Act. Alternatively, if the amount of interest is not allowable under section 57 of the Act, the amount is to be allowed under section 36(1)(iii) of the Act, as the AO is bound to determine the correct income as per law and in this regard, I most respectfully rely on Article 265 of Constitution of India and CBDT Circular on Assessee Rights as under:- “265. Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law”. CBDT Circular on Assessee’s Rights There is an old Circular issued by the Central Board of Direct Taxes Circular No: 14 (XL-35) dated April 11, 1955. It states: "Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should ITA No.37/Ahd/2023 Assessment Year: 2013-14 Page 4 of 6 (a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs." The above circular has been judicially noted and approved in many judgments and has been relied upon in support of the Assessees’ claim. 4. With regard to above contention, further, reliance is placed on the ratio of the judgment of the Hon’ble Gujarat High Court in the case of the Addl. CIT Vs Laxmi Agents Pvt Limited (115 ITR 227)(Guj) and wherein in para 18 and 21, the following has been held:- 18. There is, however, a line of decisions which take the view that the above referred classification of income under different heads is only for the limited purpose of ascertaining the figure of total income of an assessee and that once that is done, the question whether the dividend income was earned for the business purpose and if so how it should be treated for the purposes other than computation of income, should be determined on broad commercial principles. These decisions are: CIT vs. Chugandas & Co. (1965) 55 ITR 17 (SC), CIT vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC), CIT vs. Bhavnagar Trust Corporation, (P.) Ltd. (1968) 69 ITR 278 (Guj) and Western States Trading Co. P. Ltd. vs. CIT (1971) 80 ITR 21 (SC). We shall discuss the ratio of these decisions while dealing with the second question referred to us. For the present, however, it would be sufficient to note that none of these decisions says anything which detracts from the ratio of the above-referred decisions in the cases of United Commercial Bank (1957) 32 ITR 688 (SC), East India Housing and Land Development Trust Ltd. (1961) 42 ITR 49 (SC) and Express Newspapers Ltd. (1964) 53 ITR 250 (SC.) 21. ............. It is true that, in ordinary course, according to general principles applicable to this question, expenditure incurred for earning income falling under a particular head should be deducted only under that head. But this general principle has to be read subject to the special provisions contained in cl. (iii) of s. 36(1) as regards deduction of interest. The relevant portion of s. 36 is as under : " 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s. 28 -- ...... (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. " This being a special provision regarding deduction of the interest amount, if a case falls within its terms, the general principles on which reliance is placed by the Revenue would be of no avail to it. We shall, therefore, presently consider whether the facts of this case are covered by this special provision. The main requirement of the above quoted cl. (iii) of s. 36(1) is that the interest amount which is sought to be deducted in computing business income under s. 28 should be in respect of capital which is borrowed " for the ITA No.37/Ahd/2023 Assessment Year: 2013-14 Page 5 of 6 purpose of business ". Therefore, if it is found in this case that the borrowings in question were made " for the purpose of business ". cl. (iii) of s. 36(1) would have full application and deduction of interest amount must be made from profits and gains of business. 5. In view of the above facts, no part of interest is required to be disallowed and therefore the learned AO should be directed to allow the said interest amount of Rs.16,37,358/-; either under section 57(iii) or section 36(1)(iii) of the Act. 7. The Ld. AR also pointed out the reply filed before the Assessing Officer as well as submissions before the CIT(A) and pointed out that the assessee made the interest expenses for contribution in partnership firm Disha Realtors towards 7,32,507/- should have been considered and taken into account by the Assessing Officer and, therefore, the assessee should have even if not allowable under Section 57 the amount of interest, the same should have been allowed under Section 36(1)(iii) of the Act. 8. The Ld. DR submitted that the assessee is claiming the interest expenses in respect of Disha Realtors but there is no interest incurred or given by the assessee. The Ld. DR submitted that there is a deficiency in the claim and no break-up can explain the partnership business income in the present scenario and, therefore, the Assessing Officer has rightly disallowed the claim under Section 57 of the Act. 9. Heard both the parties and perused all the relevant material available on record. It is pertinent to note that the income received from partnership firms cannot be treated as interest income earned. The partnership interest income under Section 28(5) of the Act has already been allowed by the Assessing Officer and the income from interest under the head income from other sources was also allowed by the Assessing Officer in respect of claiming interest expenses to the extent of Rs.40,00,000/-. The component of interest expenses for contribution in partnership form Disha Realtors is not actual interest expenses as from the Balance Sheet the computation of income it can be seen that the assessee has 36% in Disha Realtors as it is own shares and there is no component of interest involved in that particular firm. Therefore, there was no direct nexus between business income related to partnership firm. Therefore, the net interest earned out of interest expenses to the extent of Rs.16,37,358/- was rightly disallowed under Section 57(3) of the Act by the Assessing Officer and the CIT(A) has rightly confirmed the same. Alternate argument of the assessee/Ld. AR that if the amount of interest is not allowable under Section 57 of the Act, the amount is to be allowed under Section 36(1)(iii) of the Act does not ITA No.37/Ahd/2023 Assessment Year: 2013-14 Page 6 of 6 appeal as the assessee at no point of time has established that the said interest amount is part of the business income/partnership firm income. There was no indication that the said amount was borrowed for the purpose of business. Therefore, ground no.2 is dismissed. 10. In the result, appeal of the assessee is dismissed. Order pronounced in the open Court on this 26 th day of May, 2023. Sd/- (SUCHITRA KAMBLE) Judicial Member Ahmedabad, the 26 th day of May, 2023 PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad