ROSHAN SETHIA, MUMBAI V. ACIT 18(2), MUMBAI

ITA 5860/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92555 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 21-01-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 26-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: LOVE KUMAR
• Assessee Lawyers: B V JHAVERI
• Keywords: Salary income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D , MUMBAI BEFORE SHRI R.C. SHARMA , ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 5860 /M/2012 ASSESSMENT YEAR: 200 9 - 1 0 SHRI ROSHAN SETHIA, 601, MADHUKUNJ, SAYANI ROAD, PRABHADEVI, MUMBAI 25 MUMBAI 400 021 PAN: AHBPS 1231K VS. THE ACIT, WD. 18(2), 1 ST FLOOR, IT OFFICE, PIRAMAL CHAMBERS, LALBAG, MUMBAI 400 0 1 2 (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI B.V . JHAVERI, A.R. REVENUE BY : SHRI LOVE KUMAR , D.R. DATE OF HEARING : 30 .04. 201 5 DATE OF PRONOUNCEMENT : 10.05. 2015 O R D E R PER VIJAY PAL RAO , JUDICIAL MEMBER: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 2 7 .0 7 .201 2 OF TH E CIT(A) FOR THE ASSESSMENT YEAR 200 9 - 1 0. THE ASSESSEE H AS RAISED THE FOLLOWING GROUNDS IN THIS APPEAL: 1. THE LEARNED CIT (A) 29 (HEREINAFTER REFERRED TO AS THE CIT (A)) ERRED IN LAW AND ON FACTS IN CONFIRMING THE ASSESSMENT OF THE TOTAL INCOME OF THE APPELLANT AT RS.5835,060/ - AS AGAINST RS.2249398/ - RETURNED BY THE APPELLANT. 2. ORDER DT. 27/07/12 PASSED BY LD. CIT(A) AS WELL AS ORDER DT. 31/10/11 PASSED BY LD. ACIT ARE BAD IN LAW AS THE SAME ARE NOT BASED ON FACTS AND BASED ON ASSUMPTIONS OR SURMISE S OR ERRONEOUS FINDINGS AND HAS NOT CONSIDERED SUBMISSIONS MADE BY APPELLANT. 3. THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF INTEREST OF RS.3585618 U/S 57(III) VIDE PARA 3.2 OF HIS ORDER ( PARAGRAPH 6 OF ASSESSMENT ORDER). ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 2 4. THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN NOT ADJUDICATING ONE OF THE GROUND OF APPEAL BEING GROUND NO.4 WHICH CONTESTED THAT WITHOUT PREJUDICE TO ABOVE, ALTERNATIVELY INTEREST PAID IS TO BE ALLOWED U/S 36 (1) (III) OR U/S 37. 5. THE LD. CIT (A) ERR ED IN LAW AND ON FACTS IN NOT ADJUDICATING ONE OF THE GROUND OF APPEAL BEING GROUND NO.5 WHICH CONTESTED ACTION OF LD. ACIT IN ASSESSING DIRECTOR REMUNERATION AS INCOME FROM SALARY INSTEAD OF INCOME FROM BUSINESS OR PROFESSION AS CLAIMED BY APPELLANT. 6 . THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN NOT ADJUDICATING ONE OF THE GROUND OF APPEAL BEING GROUND NO.6 WHICH CONTESTED AS AN ALTERNATIVE GROUND, WITHOUT PREJUDICE TO ABOVE, THE LD. ACIT HAS ERRED IN LAW AND ON FACTS IN INCLUDING INTEREST INCOME OF M INOR CHILDS OF RS. 4123008.49 IN STEAD OF RS. 1601095.49 (4123008.49 - 2521913.00) IN APPELLANT INCOME. 7. THE LD. CIT (A) ERRED IN LAW IN NOT CONSIDERING ANY AUTHORITIES CITED BY HIM IN SUPPORT OF HIS CASE. 8. THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN CONFIRMING LEVY OF INTEREST U/S 234 B AND U/S 234C VIDE PARA 5 OF HIS ORDER. 2. AT THE TIME OF HEARING THE LD. A.R. OF THE ASSESSEE HAS STATED THAT THE ASSESSEE DOES NOT PRESS GROUND NOS.1, 2, 6 & 7 AND THE SAME MAY BE DISMISSED AS NOT PRESSED. THE LD. D.R. HAS RAISED NO OBJECTION IF THE GROUND NOS.1, 2, 6 & 7 OF THE ASSESSEES APPEAL ARE DISMISSED AS PLEADED. ACCORDINGLY, THE GROUND NOS.1, 2, 6 & 7 OF THE ASSESSEES APPEAL ARE DISMISSED BEING NOT PRESSED. 3. GROUND NOS.3 TO 5 ARE REGARDING THE DISA LLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 57(III) OF THE ACT. THE ASSESSEE HAS FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 22 , 49 , 398/ - . DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER (AO) HAS NOTED THAT THE ASSESSEE DISCLOSED IN TEREST INCOME OF RS.23,64,399/ - UNDER THE HEAD INCOME FROM OTHER SOURCES WHEREAS THE ASSESSEE HAS DEBITED T HE INTEREST PAID TO VARIOUS PAR T I ES AMOUNTING TO RS.43, 88 ,240/ - AND CLUBBING INTEREST INCOME OF RS.41,23,008/ - ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 3 OF THREE MINOR CHILDREN . THE AO DIS ALLOWED INTEREST EXPENDITURE TO THE EXTENT OF RS.35,88,438/ - ON THE GROUND THAT THE ASSESSEE HAS USED THE INTEREST BEARING FUND FOR GIVING INTEREST FREE LOAN TO MRS. TARA LODHA AS WELL AS FOR MAKING INVESTMENT IN SHARES. THE AO ALSO OBSERVED THAT THE LOAN S WERE UTILIZED FOR ACQUIRING CONTROL L I N G INTEREST IN M/S. SIM DIAM P. LTD. AND THEREFORE THE INTEREST IS NOT ALLOWABLE IN VIEW OF THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. AMRITABEN R. SHAH 238 ITR 777 . 4. THE ASSESSEE CHALLENGED THE ACTION OF THE AO BEFORE THE LD. CIT(A) BUT COULD NOT SUCCEED . THE LD. CIT(A) HAS HELD THAT THE ASSESSEE HAS BORROWED FUND AND DIVERTED IT TO INVESTMENT IN THE SHARES AND FOR THE PURPOSE OF SHARE CAPITAL IN A CLOSELY HELD COMPANY. THE LD. C IT(A) WAS OF THE VIEW THAT INTEREST ON MONEY BORROWED CAN BE DEDUCTED AS DEDUCTION UNDER SECTION 57(III) ONLY IF THE ASSESSEE EARNED INTEREST FROM SUCH BORROWED FUND. 5. BEFORE US, THE LD. A.R. OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS BORROWE D FUND AND INVESTED THE SAME BY EITHER GIVING LOAN OR INVESTMENT IN THE SHARES OF THE GROUP CONCERN AS WELL AS SHARES OF THE OTHER LISTED COMPANIES FROM WHICH IT COULD EARN INTEREST INCOME, DIVIDEND INCOME AND CAPITAL GAIN ON SALE OF SUCH SHARES. THE LD. A.R. FURTHER POINTED OUT THAT THE INVESTMENT IN THE SHARES OF M/S. SIM DIAM P. LTD. WHICH IS A CLOSED COMPANY OF THE ASSESSEE WAS IN FACT LOAN WHICH WAS CON VER TED INTO THE CAPITAL. THE ASSESSEE HAS INVESTED THE AMOUNT BY GIVING LOAN TO THE SAID COMPANY ON WHICH THE ASSE SSEE EARNED INTEREST INCOME IN THE EARLIER YEARS. HOWEVER, IN THE YEAR UNDER CONSIDERATION THE SAID LOAN WAS ALREADY CONVERTED INTO THE SHARE CAPITAL, THEREFORE THE INTEREST WHICH WAS EARNED IN THE EARLIER YEAR COULD NOT BE EARNED DURING TH E YEAR UNDER CONSIDERATION. THE LD. A.R. HAS CONTENDED THAT EARNING INCOME FROM THE EXPENDITURE INCURRED IS NOT A ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 4 CONDITION FOR ALLOWING THE DEDUCTION UNDER SECTION 57(III) OF THE ACT. IT IS ONLY FOR THE PURPOSE OF MAKING OR EARNING OF INCOME WHICH IS RE QUIRED FOR ALLOWING THE DEDUCTION UNDER SECTION 57(III) AND NOT THE ACTUAL INCOME EARNED BY THE ASSESSEE. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAJENDRA PRASAD MOODY (1978) 115 ITR 5 19 (SC) AND SUBMITTED THAT THE HONBLE SUPREME COURT HAS HELD THAT 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 WHICH IS RELEVANT IN DETERMINING THE APPLICABILITY OF SECTION 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. THEREFORE, IT IS NOT THE PREREQUISITE CONDITION UNDER SECTION 57(III) THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE E XPENDITURE FOR DEDUCTION. THE LD. A.R. HAS CONTENDED THAT THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE WHICH IS MORE THAN THE INCOME EARNED DURING THE YEAR DOES NOT AUTHORIZE THE AO TO DISALLOW THE EXPENDITURE IN EXCESS OF INCOME WHEN THE PURPOSE OF THE EXPENDITURE IS TO EARN THE INTEREST INCOME, DIVIDEND INCOME AND CAPITAL GAIN OUT OF THE INVESTMENT MADE BY THE ASSESSEE. THE LD. A.R. HAS FURTHER POINTED OUT THAT IN THE CASE OF THE ASSESSEE AS PER THE BALANCE SHEET AS ON 31.03.06 THE BORRO WING S TO TH E EXTENT OF RS.3 ,0 8 , 56 , 407/ - WERE UTILIZED IN THE INVESTMENT IN THE ERSTWHILE PARTNERSHIP FIRM OF RS.3,18,24,635/ - TO EARN INTEREST THERE FROM, REMUNERATION AND SHARE IN THE PROFIT. THE BUSINESS OF ERSTWHILE FIRM WAS SUCCEEDED BY M/S. SIM DIAM P. LTD. W.E .F. 01.04.06. AS PER THE BALANCE SHEET AS ON 31.03.07 BORROWING TO THE EXTENT OF RS.6,33,64,665/ - WERE UTILIZED IN GIVING LOAN TO M/S. SIM DIAM P. LTD. TO THE TUNE OF RS.3,58,01,120/ - AND INVESTMENT IN SHARES OF M/S. SIM DIAM P. LTD. TO THE EXTENT OF RS.3 ,06,00,000/ - . THUS THE BORROWED FUND HAS BEEN UTILIZED IN GIVING LOAN AS WELL AS INVESTMENT IN SHARES OF M/S. SIM DIAM P. LTD. THE PURPOSE OF TAKING LOAN WAS TO EARN THE INCOME FROM THE INVESTMENT EITHER IN ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 5 THE FORM OF INTEREST OR IN THE FORM OF DIVIDEND OR CAPITAL GAIN AND THEREFORE THE INTEREST EXPENDITURE IS ALLOWABLE DEDUCTION UNDER SECTION 57(III) OF THE ACT. THE LD. A.R. HAS ALSO RELIED UPON THE FOLLOWING DECISIONS : 1. DELITE ENTERPRISES (P.) LTD. VS. INCOME - TAX OFFICER [(2008) 22 SOT 245 (BOM.)] DATED FEBRUARY, 2008. 2. CIT VS. M/S. DELITE ENTERPRISES (P.) LTD. ITXA NO.110 OF 2009 DATED FEBRUARY, 2009 (BOM.) 3. M/S. AVSHESH MERCANTILE (P.) LTD. VS. DCIT (2012) 26 TAXMANN.COM 43 (MUM.) 4. CIT VS. DARASHAW & CO. (P.) LTD. (2014 ) 49 TAXMANN.COM 143( BOM.) 5. M/S. TOPSTAR MERCANTILE PVT. LTD. VS. ACIT (2011) 334 ITR 374 (BOM.) 6. ACIT VS. M/S. DELITE ENTERPRISES (P.) LTD. (2011) 135 TTJ 663 (MUM.) 7. CIT V. M. ETHURAYAN (2005) 273 ITR 95 (MAD.) 6. ON THE OTHER HAND, THE LD. D.R. HAS SUBMITTED THAT TH E AO HAS RECORDED THE FACT THAT THE ASSESSEE HAS TAKEN LOAN FROM SHRI ROHIT MANHOT WHICH WAS GIVEN AS A LOAN TO MRS. TARA LODHA & JAIN I NVESTMENT AND ALSO USED FOR REPAYMENT OF LOAN TO MRS. PURVI. AS THE ASSESSEE HAS NO INTEREST INCOME FROM MRS. TARA LODH A & JAIN INVESTMENT AND REPAYMENT OF LOAN TO MRS. PURVI ALMOST AT THE END OF THE YEAR THE INTEREST PAYMENT TO SHRI ROHIT MANHOT IS NOT ALLOWABLE UNDER SECTION 57(III) OF THE ACT AS THE EXPENDITURE WAS NOT INCURRED FOR THE PURPOSE OF EARNING THE INTEREST IN COME. THE ASSESSEE HAS ALSO TAKEN LOAN FROM SMT. SOHNIDEVI SETHIA WHICH WAS UTILIZED FOR GIVING LOAN TO M/S. SIM DIAM P. LTD. OF RS.28,00,000/ - AND TO KARVY I NFRASTRUCTURE OF RS.90,00,000/ - . THE ASSESSEE RECEIVED BACK A SUM OF RS.18,00,000/ - FROM M/S. SI M DIAM P. LTD. AND GAVE IT TO SANGHAVI SAVLA STOCK BROKER THUS THE INTEREST BEARING AMOUNT WAS DIVERTED FOR INVESTMENT IN SHARES. SIMILARLY, THE LOAN TAKEN FROM SIM JEWELLERY PVT. LTD. WAS UTILIZED FOR GIVING LAON TO M/S. SIM DIAM P. LTD. OF RS.3,00,000/ - ON 03.07.08 . ON 04.08.08 THE ASSESSEE ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 6 RECEIVED RS.1,50,000/ - FROM M/S. SIM DIAM P. LTD. AND PAID TO JAIN INVESTMENT ON SAME DATE THUS THE INTEREST BEARING AMOUNT WAS DIVERTED FOR OTHER INVESTMENT. FURTHER, THE INTEREST BEARING AMOUNT WAS INVESTED IN THE SHARES OF M/S. SIM DIAM P. LTD. TO ACQUIRE CONTROLLING INTEREST, THEREFORE THE INTEREST EXPENDITURE ON SAID AMOUNT IS NOT ALLOWABLE UNDER SECTION 57(III). HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE HEARD THE LD. D.R. AS WELL A S THE LD. A.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE AO HAS DISALLOWED THE INTEREST EXPENDITURE UNDER SECTION 57(III) ON THE GROUND THAT THE MAJOR PART OF THE INTEREST BEARING LOAN AMOUNT WAS USED BY THE ASSESSEE IN THE INVESTMENT OF SHARES OF M/S. SIM DIAM P. LTD. AS WELL AS OTHER LISTED AND NON LISTED COMPANIES, THEREFORE THE INTEREST EXPENDITURE AS PER THE AO WAS NOT INCURRED FOR EARNING THE INCOME ASSESSABLE AS INCOME FROM OTHER SOURCES AND CONSEQUENTLY THE INTEREST EXPENDITURE IS NOT INC URRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR EARNING THE INCOME. THE AO HAS GIVEN THE DETAILS OF THE OPENING BALANCES OF LOAN, ADDITION, REPAYMENT AS WELL AS THE OUTSTANDING BALANCE AS ON 31.03.09 AT PAGE 3 & 4 OF THE ASSESSMENT ORDER IN THE PECULIAR FORM AS UNDER: ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 7 8. THUS, THE AO NOTED THAT THE ASSESSEE HAS RECEIVED FRESH LOAN FROM FOUR PARTIES NAMELY SHRI ROHIT MANHOT, SIM JEWELLERY PVT. LTD., SOHNIDEVI SETHIA AND AMAN SETHIA DURING THE YEAR UNDER CONSIDERATION. THE OTHER AMOUNTS WERE OUTSTANDIN G BALANCES OF THE EARLIER YEARS AND SHOWN AS OPENING BALANCE. THERE IS NO DISPUTE THAT THERE WAS NO DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 57(III) IN THE EARLIER AS WELL AS ABOUT THE FACT THAT EARLIER THE ASSESSEE HAS INVESTED IN THE PARTNERSH IP FIRM, THE BUSINESS OF WHICH WAS SUCCEEDED BY M/S. SIM DIAM P. LTD. W.E.F. 01.04.2006 . THE BORROWED AMOUNT TO THE EXTENT OF RS.3,58,01 , 120/ - WAS UTILIZED FOR GIVING LOAN TO M/S. SIM DIAM P. LTD. FURTHER TO THE EXTENT OF RS.3,06,00,000/ - WAS UTILIZED FOR INVESTMENT IN THE SHARES OF M/S. SIM DIAM P. LTD. AS FAR AS THE OTHER AMOUNTS OF BORROWED FUND THE SAME WERE USED FOR INVESTMENT IN THE SHARES OF THE LISTED COMPANIES AS WELL AS NON LISTED COMPANIES. THERE IS NO DISPUTE THAT AS FAR AS THE LOAN AMOUNT TO ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 8 M/S. SIM DIAM P. LTD. THE SAME H AS YIELDED INTEREST INCOME TO THE ASSESSEE. THEREFORE TO THAT EXTENT THERE IS NO QUESTION OF THE INVESTMENT MADE FOR NOT EARNING ANY INCOME. SO FAR AS THE REMAINING INVESTMENT IS CONCERNED, THE AO HAS DISALLOWED THE CORRE SPONDING INTEREST EXPENDITURE ON THE GROUND THAT THE ASSESSEE HAS NOT EARNED ANY INCOME ON THE SAID INVESTMENT. IT IS PERTINENT TO NOTE THAT WHAT IS REQUIRED FOR ALLOWING THE DEDUCTION UNDER SECTION 57(III) IS THE PURPOSE OF THE EXPENDITURE INCURRED BY TH E ASSESSEE AND THE SAID PURPOSE IS FOR MAKING OR EARNING THE INCOME. THEREFORE, IT IS THE POTENTIAL INCOME FROM THE EXPENDITURE INCURRED BY THE ASSESSEE AND NOT THE ACTUAL INCOME EARNED BY THE ASSESSEE FROM SUCH EXPENDITURE. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAJENDRA PRASAD MOODY (SUPRA) WHILE CONSIDERING THE QUESTION OF ALLOWABILITY OF THE EXPENDITURE UNDER SECTION 57(III) HAS OBSERVED AS UNDER: WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED 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 FACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT 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 NOT NECESSAR Y THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE. IT MAY BE POINTED OUT THAT AN IDENTICAL VIEW WAS TAKEN BY THIS COURT IN EASTERN INVESTMENTS LTD. V. CIT [1951] 20 ITR 1, 4 (SC), WHERE INTERPRETING THE CORRESPONDING PROVISIO N IN S. 12(2) OF THE INDIAN I.T. ACT, 1922, WHICH WAS IPSISSIMA VERBA IN THE SAME TERMS AS S. 57(III). BOSE J., SPEAKING ON BEHALF OF THE COURT, OBSERVED : ' IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS 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 THE REVENUE, THE EXPENDITURE W OULD DISQUALIFY FOR DEDUCTION ONLY IF NO INCOME RESULTS 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 ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 9 WHERE THE EXPE NDITURE 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 FROM OTHER SOURCES '. BUT IF THERE IS NO INCOME, THEN, ON THE ARGUMENT OF THE REVENUE, THE EXPE NDITURE 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 PRODUCE SUCH ILLOGICALITY. MOREOVER, IT MU ST 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 INCOME 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 EXPENDITURE IS X OR Y OR NIL; WHATEVER IS THE PROPER EXPENDITURE ALLOWED BY THE STATUTE 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 APPRECIATE HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOM E. WHATEVER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUNTING AND THE INTERPRETATION OF S. 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOME. 9. THERE IS A POTENTIAL INCOME IN THE SHAPE OF DIVIDEND ON THE INVESTMENT MADE BY THE ASSESSEE IN THE SHARES OF M/S. SIM DIAM P. LTD. AS WEL L AS OTHER LISTED AND NON LISTED COMPANIES. ACCORDINGLY, THE POTENTIAL INCOME FROM THE INVESTMENT IS NOT RULED OUT THOUGH THERE WAS NO REAL INCOME DURING THE YEAR UNDER CONSIDERATION. THE TEST FOR ALLOWING THE EXPENDITURE UNDER SECTION 57(III) IS THE PUR POSE FOR MAKING OR EARNING INCOME AND NOT THE ACTUAL FULFILLMENT OF THE PURPOSE AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAJENDRA PRASAD MOODY (SUPRA) . 10. THE ISSUE BEFORE US IS THE ALLOWABILITY OF THE EXPENDITURE UNDER SECTION 57(II I) AND THEREFORE EVEN IF THE POTENTIAL DIVIDEND INCOME MAY BE AN EXEMPTED INCOME WHICH MAY ATTRACT THE PROVISIONS OF SECTION 14A BUT IN THE ABSENCE OF ANY SUCH DISALLOWANCE BY THE AO THE ISSUE DOES NOT ARISE FROM THE ORDERS OF THE AUTHORITIES BELOW FOR REC ONSIDERATION . T HEREFORE AS FAR AS THE CONDITIONS FOR ALLOWABILITY OF THE EXPENDITURE UNDER SECTION 57(III) IF THE EXPENDITURE IS LAID ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 10 OUT FOR THE PURPOSE OF EARNING THE INCOME THEN THE CONDITIONS REQUIRED UNDER SECTION 57(III) ARE FULFILLED. EVEN OTHERWI SE THE AO HAS DISCUSSED THE MOVEMENT OF THE FUND WHICH SHOWS THAT THE ASSESSEE HAS INVESTED THE FUND IN THE SHARES WHICH WAS TREATED BY THE AO AS DIVERSION OF THE INTEREST BEARING FUND. WE FAILED TO UNDERSTAND AS TO HOW THE INVESTMENTS IN SHARES CAN BE TR EATED AS DIVERSION OF FUND WHEN THE INCOME ON SUCH INVESTMENT WILL BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES . O NCE THE EXPENDITURE LAID OUT BY THE ASSESSEE FOR THE INVESTMENT WHICH WAS CAPABLE OF EARNING THE INCOME THE CONDITION UNDER SECTION 57(III) IS FULFILLED. BY FOLLOWING THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAJENDRA PRASAD MOODY (SUPRA) THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. DARASHAW & CO. PVT. LTD. 226 TAXMAN 193 HELD IN PARA 11 AS UNDE R: 11. IN OUR VIEW, AFTER THIS AUTHORITATIVE PRONOUNCEMENT BY THE HON'BLE SUPREME COURT, THERE IS NO SCOPE FOR ANY OTHER CONSTRUCTION AND PARTICULARLY AS SUGGESTED BY MR. GUPTA. WE ARE OF THE OPINION THAT THIS JUDGMENT OF THE HON'BLE SUPREME COURT ANSWERS THE ISSUE OF INTERPRETATION OF SECTION 57(III) SQUARELY AND IN FAVOUR OF THE ASSESSEE. MORE SO, WHEN NO CONTRARY JUDGMENT OF THE HON'BLE SUPREME COURT HAS BEEN BROUGHT TO OUR NOTICE, THE ARGUMENT THAT THIS JUDGMENT HAS BEEN MISINTERPRETED AND MISREAD BY T HE TRIBUNAL DOES NOT COMMEND TO US. THE SUPREME COURT HAS HELD THAT THE WORDS IN SECTION 57(III) SPEAK OF PURPOSE OF THE EXPENDITURE AND THAT IS RELEVANT. THE ARGUMENT OF MR. GUPTA IS THAT THE PURPOSE OF THE EXPENDITURE AND IN THE PRESENT CASE, HAS A RELAT ION WITH THE INCOME THAT IS TO BE EVENTUALLY EARNED FROM THE MSRDS BONDS. THAT THE BONDS WERE DISPOSED OF MEANS THE INCOME BY WAY OF INTEREST THEREON WOULD NOT ACCRUE ANY LONGER. THEREFORE, THE DEDUCTION BY WAY OF INTEREST ON BORROWINGS AND WHICH IS STATED TO BE A LIABILITY WAS NOT A PERMISSIBLE DEDUCTION. THAT IS THE PRECISE ARGUMENT WHICH HAS BEEN DEALT WITH AND THE HON'BLE SUPREME COURT HAS CLARIFIED THAT THE ARGUMENT OF THE REVENUE THAT 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. THE HON'BLE SUPREME COURT GAVE AN ILLUSTRATION IN THAT REGARD AND HELD THAT THE WHEN A PRO FIT 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 INCOME WOULD BE CREDITED AS A RECEIPT AND THE RESULTING INCOME OR LOSS WOULD BE DETERMINED. THE HON'BL E SUPREME COURT HELD THAT HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE A SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOME, HAS NOT BEEN EXPLAINED BY THE REVENUE AT ALL. IT IS IN THESE CIRCUMSTANCES THE HON'BLE SUPREME COURT HELD THAT SECTION 57(III) DOES NOT REQUIRE ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 11 THAT THE PURPOSE MUST BE FULFILLED SO AS TO BE EXPENDITURE QUALIFIED FOR DEDUCTION. THE LANGUAGE OF THE SECTION DOES NOT ADMIT OF A CONSTRUCTION THAT THE EXPENDITURE SHALL BE DEBITED ONLY IF ANY INCOME IS MADE OR EARN ED. THE HON'BLE SUPREME COURT, THEREFORE, HAS CONCLUDED THE ISSUE AND IN OUR OPINION, IN FAVOUR OF THE REVENUE. IN DOING THAT, THE HON'BLE SUPREME COURT REFERS TO THE VIEWS OF SEVERAL HIGH COURTS INCLUDING THIS COURT AND UPHOLDS THEM. 11. IN THE CASE IN HAND, THE AUTHORITIES BELOW HAVE IGNORED THE POTENTIAL INCOME AND THE PURPOSE OF EXPENDITURE LAID OUT FOR EARNING THE POTENTIAL INCOME ON THE INVESTMENT BUT HAVE GIVEN MUCH EMPHASIS ON ACTUAL EARNING OF INCOME AND INVESTMENT OF M/S. SIM DIAM P. LTD. FOR CO NTROLLING THE STATE. A SIMILAR VIEW IS TAKEN BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS . M. ETHURA J AN (273 ITR 95 (MAD) IN PARA 9 TO 11 AS UNDER: 9. IT IS NOT IN DISPUTE THAT THE RESPONDENT/ASSESSEE WAS A MAJOR SHAREHOLDER OF BINNY AND CO. LTD., WHICH WAS REFERRED TO BY THE BIFR AS A SICK INDUSTRY, AND THE RESPONDENT/ASSESSEE BORROWED MONEYS FROM SUNDARAM FINANCE AND DIAMOND DISTRICTS AND INVESTED THE SAME IN BINNY AND CO. LTD., TO REHABILITATE THE SAID COMPANY UNDER THE BIFR SCHEME AND TO EARN DIVIDEND THEREFROM, BUT HOWEVER, THE RESPONDENT/ASSESSEE DID NOT RECEIVE ANY DIVIDEND FROM THE COMPANY. HENCE, THE RESPONDENT/ASSESSEE CLAIMED DEDUCTION OF A SUM OF RS. 60,00,000 AS INTEREST PAID ON THE SAID BORROWALS UNDER SECTION 57(III) OF THE ACT. 10. WHERE THE ASSESSEE BORROWED MONEYS FOR THE PURPOSE OF MAKING INVESTMENT IN CERTAIN SHARES AND PAID INTEREST THEREON DURING THE ACCOUNTING PERIOD RELEVANT TO THE ASSESSMENT YEAR, BUT DID NOT RECEIVE ANY DIVIDEND ON THE SHARES PURCHASED WITH THOSE MONEY S, WHETHER THE INTEREST ON SUCH MONEYS BORROWED IS ADMISSIBLE UNDER SECTION 57(III) OF THE ACT IN COMPUTING INCOME FROM OTHER SOURCES CAME FOR THE CONSIDERATION OF THE FULL BENCH OF THE APEX COURT IN CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 , WHEREIN THE FULL BENCH HELD THAT THE INTEREST ON MONEYS BORROWED FOR INVESTMENT IN SHARES WHICH HAD NOT YIELDED ANY DIVIDEND WAS ADMISSIBLE AS A DEDUCTION UNDER SECTION 57(III) OF THE ACT. 11. THE PLAIN AND NATURAL CONSTRUCTION OF THE LANGUAGE OF SECTION 57(III) OF THE ACT, IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THAT SECTION IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITU RE. WHAT SECTION 57(III) OF THE ACT REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. THE SECTION DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE E XPENDITURE FOR DEDUCTION : IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED, VIDE CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 (SC). ITA N O.5860/M/2012 SHRI ROSHAN SETHIA 12 12. IN VIEW OF THE ABOVE DISCUSSION AS WELL AS THE FOLLOWING JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAJENDRA PRASAD MOODY (SUPRA) , THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. DARASHAW & CO. PVT. LTD. (SUPRA) AND JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. M. ETHURAYAN (SUPRA ), WE FIND THAT THE INTEREST EXPENDITURE ON THE BORROWED AMOUNT USED FOR THE PURPOSE OF INVESTMENT IN THE SHARES IS AN ALLOWABLE DEDUCTION UNDER SECTION 57(III). 13. IN THE RESULT, THE APPEAL OF THE ASS ESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 . 0 5 . 201 5 . SD/ - SD/ - ( R.C. SHARMA ) ( VIJAY PAL RAO ) ACCOUNTANT MEMBER JUDICIA L MEMBER MUMBAI, DATED: 15. 0 5 .2015 . * KISHORE , SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.