R.K.Agarwal, Secunderabad V. DCIT, Hyderabad

ITA 496/HYD/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 6339 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-10-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 24-03-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K E SUNIL BABU
• Assessee Lawyers: C N PRASAD
• Keywords: Business income; Business expenditure; Salary income
• Section: 43D; 28; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B , HYDERABAD BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO.496/HYD/2008 ASSESSMENT 2004-05 SHRI R.K. AGARWAL, SECUNDERABAD (PAN ABLPA 4517 G) VS DCIT, CIRCLE 3(2), HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI C.N. PRASAD RESPONDENT BY: SHRI K.E. SUNIL BABU O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER PASSED BY THE CIT(A) IV, HYDERABAD DATED 28.12.200 7 AND PERTAINS TO THE ASSESSMENT YEAR 2004-05. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN IT S APPEAL: A) THE CIT(A) ERRED IN LAW AND SUSTAINING THE ACTI ON OF THE ASSESSING OFFICER IN DISALLOWING INTEREST OF RS.2,60,000/- ON THE MONIES BORROWED BY THE ASSESSEE. B) THE CIT(A) OUGHT TO HAVE SEEN THAT THE ASSESSEE BEING A PROMOTER AND MD OF SURYAJYOTHI SPINNING MILLS LTD. IN ORDER TO COMPLY WITH THE CONDITIONS LAID DOWN BY IDBI HAD BORROWED RS.38,00, 000/- FROM BALAJI TEXTILES MILL AND RS.2 LAKHS FROM SHRAVAN DESHPANDE AND INCURRED INTEREST OF RS.2.6 LAKHS THEREON. SINCE THE ASSESS EE HAD P[PROVIDED INTEREST FREE LOAN TO SURYAJYOTHI SPINNING MILLS LT D., AS ITS MD ACCORDING TO THE REQUIREMENTS OF IDBI INTEREST IS N OT CHARGED BY THE ASSESSEE TO THE COMPANY AND THEREFORE THERE IS NO J USTIFICATION IN DISALLOWING THE INTEREST OF RS.2.6 LAKHS INCURRED O N THE LOANS RAISED BY THE ASSESSEE. C) THE CIT(A) OUGHT TO HAVE ALLOWED INTEREST OF RS. 2.6 LAKHS AS DEDUCTION FROM OUT OF THE SALARY INCOME RECEIVED BY THE ASSESSEE FROM THE COMPANY SINCE THE ASSESSEE BORROWED THE MO NIES AND INVESTED IN THE COMPANY AS PROMOTER OF THE COMPANY IN VIEW OF THE ITA NO.496/HYD/2009 SHRI R.K. AGARWAL, SECUNDERABAD 2 DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF AH BALDOTA VS. ACIT (103 TTJ 517) 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IN THIS CASE IS THE MANAGING DIRECTOR OF M/S SURYA JYOTHI SPINNING MILL S LTD. AND AS SUCH DERIVES INCOME FROM SALARY BESIDES HAVING OTHER SOU RCES OF INCOME. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OF FICER NOTICED THAT THE ASSESSEE HAD CLAIMED A LOSS OF RS.2.6 LAKHS TOWARDS INTEREST PAID TO SHRI BALAJI TEXTILES MILLS ON A LOAN OF RS.38 LAKHS AND TO SHRAVAN DESH PANDE ON LOAN OF RS. 2 LAKHS. IT WAS SUBMITTED THAT THE INDUSTRIAL DEVELOPMENT BANK OF INDIA HAD SANCTIONED A LOAN TO M/S SURYAJYO THI SPINNING MILLS LTD. AND FOR COMPLYING WITH PRE DISBURSEMENT CONDIT IONS PROMOTERS ADVANCED 1.6 CRORES TO THE COMPANY. THE ASSESSEE S UBMITTED THAT HE ADVANCED 1.6 CRORES IN SUCH CIRCUMSTANCES AND HAD N OT CHARGED ANY INTEREST ON SUCH LOAN. THE ASSESSING OFFICER HOWEV ER OBSERVED THAT THE ASSESSEE HAD INCURRED INTEREST EXPENDITURE OF RS.2. 6 LAKHS ON LOANS TAKEN BY HIM WHILE NO INTEREST WAS CHARGED OR OFFERED TO TAX ON ACCOUNT OF LOANS GIVEN TO THE COMPANY. HE, THEREFORE, FELT THAT THE CLAIM OF RS.2.6 LAKHS IS NOT ALLOWABLE U/S 57(III) AS THE ASSESSEE HAD NOT E ARNED ANY INTEREST INCOME. ACCORDINGLY, THE ASSESSING OFFICER DISALLO WED THE CLAIM OF RS.2.6 LAKHS. 4. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE INTEREST FREE LOANS WERE GIVEN I N VIEW OF THE REQUIREMENTS OF THE IDBI AS HE WAS THE MANAGING DIR ECTOR OF THE COMPANY FROM WHERE HE WAS RECEIVING SALARY. IT WAS CONTEND ED THAT DEDUCTION SHOULD HAVE BEEN ALLOWED OUT OF THE SALARY INCOME R ECEIVED BY THE ASSESSEE AS THE ASSESSEE HAD BORROWED THE MONEYS AN D INVESTED IN THE COMPANY AS A PROMOTER OF THE COMPANY. HE PLACED RE LIANCE ON THE DECISION OF THE HONBLE BOMBAY ITAT IN THE CASE OF A.H. BALDOTA VS. CIT (103 TTJ 517) (10 SOT 757) (MUM BAI.) WHEREIN, IT WAS HELD ITA NO.496/HYD/2009 SHRI R.K. AGARWAL, SECUNDERABAD 3 THAT INTEREST ON BORROWED CAPITAL INVESTED IN A FIR M IS ALLOWED AS DEDUCTION FROM INTEREST AND REMUNERATION FROM THE FIRM. DURI NG THE COURSE OF APPELLATE PROCEEDINGS THE AUTHORISED REPRESENTATIVE FILED A COPY OF THE PRE- DISBURSEMENT CONDITIONS OF THE IDBI WHICH ENVISAGED PROMOTERS CONTRIBUTION OF RS.16 MILLION. 5. FURTHER, THE LEARNED AUTHORISED REPRESENTATIVE RELIED ON THE JUDGEMENT IN THE CASE OF SANTOSH KUMAR AGARWAL VS. ACIT (78 ITD 394) (SMC) (MUM). 6. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT THE ORDER RELIED BY THE AUTHORISED R EPRESENTATIVE IS NOT APPLICABLE TO THE FACT OF THE PRESENT CASE. IN THE INSTANT CASE, THE MANAGING DIRECTOR BORROWED MONEY HIMSELF AND THE IN COME EARNED FROM THE ASSESSEE COMPANY NOT ASSESSABLE UNDER THE HEAD OF PROFIT AND GAINS FROM THE BUSINESS AND IN CASE OF PARTNERSHIP FIRM I NTEREST RECEIVED FROM THE FIRM CONSTITUTES AS INCOME FROM BUSINESS AND PR OFESSION. BUT IN THE INSTANT CASE, IF AT ALL THE MANAGING DIRECTOR RECEI VES INTEREST FROM THE ASSESSEE COMPANY IT SHOULD BE ASSESSED FROM INCOME FROM OTHER SOURCES AND AS SUCH THE INTEREST PAID BY THE DIRECTOR CANNO T BE ELIGIBLE AS BUSINESS EXPENDITURE OR UNDER HEAD INCOME FROM OTHER SOURCES U/S 57(3). HE RELIED ON THE JUDGEMENT IN THE CASE OF KANKHAL INVESTMENTS AND TRADING CO. (P) LTD. VS. ACIT (301 ITR 359) (MUM) AND IN THE CASE OF KHAZANA HOLDINGS P LTD. VS. ACIT (AT) (MUM.) (301 ITR 311). 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, IN THE PRESENT CA SE, THE AMOUNT WAS BORROWED BY DIRECTORS IN THEIR PERSONAL CAPACITY FO R MAKING INVESTMENT IN M/S SURYA JYOTHI SPINNING MILLS LTD. IT IS ALSO AD MITTED FACT THAT THE ASSESSEE HEREIN NOT ENGAGED IN THE BUSINESS OF INVE STMENTS TO MAKE AN ITA NO.496/HYD/2009 SHRI R.K. AGARWAL, SECUNDERABAD 4 INVESTMENT IN M/S SURYAJOYTHI SPINNING MILLS (P) LT D. HAD THE ASSESSEE MADE THE INVESTMENT IN A COMPANY IN THE FIELD OF IN VESTMENT ACTIVITY, THEN THE CLAIM OF THE ASSESSEE COULD HAVE BEEN ALLOWED U /S 36(1)(III) OF THE IT ACT. FOR CLAIMING ANY DEDUCTION U/S 30 TO 43D OF T HE ACT WHILE COMPUTING THE INCOME FROM BUSINESS, THE INCOME OF THE ASSESSE E HAS TO BE COMPUTED UNDER THE HEAD PROFIT AND GAIN FROM BUSINESS OR PR OFESSION. IF THE INCOME OF THE ASSESSEE FALLS UNDER THE HEAD OF INCOME FRO M BUSINESS OR PROFESSION, CONNECTED EXPENDITURE TO CARRY ON SUCH BUSINESS IS TO BE ALLOWED. IT WOULD BE INCONGRUOUS TO CONTEND THAT T HE INCOME FROM A RECEIPT IS COMPUTED UNDER ONE HEAD AND THE CONNECTE D EXPENDITURE IS CONSIDERED UNDER SOME OTHER HEAD. IN OUR VIEW, THE RECEIPTS AND THE EXPENDITURE HAVING NEXUS WITH EACH OTHER MUST BE CO NSIDERED UNDER ONE HEAD ONLY. IF THE EXPENDITURE INCURRED BY THE ASSE SSEE IS NOT ALLOWABLE UNDER THAT HEAD, THEN IT CANNOT BE ALLOWED EVEN IF INCURRED BY THE ASSESSEE. NORMALLY, INCOME FROM BUSINESS RECEIPT IS COMPUTED UNDER THE HEAD PROFIT AND GAINS FROM BUSINESS OR PROFESSION . BUT WHERE A PARTICULAR RECEIPT, EVEN THOUGH BUSINESS RECEIPT, FALLS UNDER ANY OF THE OTHER HEADS PRESCRIBED IN SECTION 14 OF THE IT ACT, IN OUR HUMB LE OPINION, THE RECEIPT AND THE CONNECTED EXPENDITURE MUST BE TAKEN OUT FRO M THE PURVIEW OF THE HEAD PROFIT AND GAINS BUSINESS OR PROFESSION AND COMPUTE THE INCOME UNDER THE RELEVANT HEAD. IT IS THE DUTY OF THE ASS ESSEE TO ESTABLISH THE NEXUS OF THE FUNDS BORROWED WITH THE INVESTMENT IN BUSINESS. SECTION 36(1)(III) PROVIDES FOR DEDUCTION OF INTEREST ON TH E LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCT ION IN THE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSESSEE TO PROVE THAT THE LOANS WERE RAISED BY THE ASSESSEE AND THE SAME WERE USED FOR B USINESS PURPOSE OF THE ASSESSEE. IF THE LOAN FUND WAS USED OTHER THAN BY THE ASSESSEE, THE INTEREST ON SUCH LOAN CANNOT BE ALLOWED AS DEDUCTIO N U/S 36(1) (III) IN THE HANDS OF THE ASSESSEE OR U/S 57(3) AS THE CASE MAY BE. ONLY THAT EXPENDITURE HAVING NEXUS WITH THE BUSINESS OF THE A SSESSEE ARE TAKEN INTO ITA NO.496/HYD/2009 SHRI R.K. AGARWAL, SECUNDERABAD 5 CONSIDERATION WHILE COMPUTING THE INCOME U/S 28 IN ACCORDANCE WITH THE PROVISIONS OF SECTION 30 TO 43D AS PROVIDED U/S 29 OF THE IT ACT. SIMILAR IS THE POSITION, WHEN THE INCOME IS COMPUTED UNDER TH E HEAD INCOME FROM OTHER SOURCES WHILE ALLOWING THE DEDUCTION U/S 57( 3). IT PROVIDES THAT DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E OR ALLOWANCES MENTIONED THEREIN THE DEDUCTION PRESUPPOSES THE EXI STENCE OF RECEIPTS UNDER THIS HEAD. IF THE RECEIPTS ARE TO BE CONSIDE RED UNDER THE OTHER HEADS, THEN THE QUESTION OF DEDUCTION UNDER THE HEA D PROFIT AND GAINS, BUSINESS OR PROFESSION COULD NOT ARISE. THE RECEI PT AND EXPENDITURE SHALL GO HAND IN HAND. IN OUR OPINION, THE EXPENDITURE I NCURRED BY THE ASSESSEE HAVING NO NEXUS WITH THE INCOME EARNED BY THE ASSES SEE AND AS SUCH THE CLAIM OF THE ASSESSEE TOWARDS INTEREST CANNOT BE AL LOWED EITHER UNDER THE HEAD FROM BUSINESS OR PROFESSION OR INCOME FROM OTH ER SOURCES. THE ORDERS RELIED BY THE LEARNED DEPARTMENTAL REPRESENT ATIVE ALSO SUPPORTS OUR VIEW. ACCORDINGLY, THE APPEAL OF THE ASSESSEE DISM ISSED. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IN ITA NO.496/HYD/2008 STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT 8.10.2 010 SD/- SD/- G.C. GUPTA CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED THE 8 TH OCTOBER, 2010 COPY FORWARDED TO: 1. SHRI R.K. AGARWAL, MANAGING DIRECTOR, SURYAJYOTH I SPINNING MILLS LTD., 105, 7 TH FLOOR, SURYA TOWERS, SP ROAD, SECUNDERABAD 2. DCIT, CIRCLE 3(2), HYDERABAD 3. CIT(A)-IV, HYDERABAD. 4. CIT, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. NP