SKM Maeilanandhan, Erode V. ACIT, Erode

ITA 734/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57771 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 04-01-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 21-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RANGARAJAN JUNIOR
• Assessee Lawyers: N C RAVIKRISHNAN
• Keywords: Commercial expediency
• Section: 37(1); 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER I.T.A. NO. 734/MDS/2011 (ASSESSMENT YEAR : 2008-09) SHRI SKM. MAEILANANDHAN, H-41, PERIYAR NAGAR, ERODE 638 001. PAN : ADGPM2933H (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I, ERODE. (RESPONDENT) APPELLANT BY : SHRI N.C. RAVIKRISHNAN, ADVOCATE RESPONDENT BY : SHRI K.E.B. RA NGARAJAN, JUNIOR STANDING COUNSEL DATE OF HEARING : 04.01.2011 DATE OF PRONOUNCEMENT : 13.01.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, ITS GRIEVAN CE IS THAT THE LOWER AUTHORITIES DID NOT ALLOW THE CLAIM OF INTERE ST EXPENSES ON THE BORROWINGS MADE BY IT. I.T.A. NO. 734/MDS/11 2 2. SHORT FACTS APROPOS ARE THAT ASSESSEE, EARNING I NCOME FROM SALARY, HOUSE PROPERTY AND OTHER SOURCES, HAD FILED RETURN FOR THE IMPUGNED ASSESSMENT YEAR WITH TOTAL INCOME OF ` 42,72,010/-. INCOME FROM OTHER SOURCES REPRESENTED INTEREST IN COME AND DIVIDEND INCOME. DETAILS WERE CALLED FOR BY THE A. O. FROM PERUSAL OF THE DETAILS, IT WAS NOTED BY THE A.O. THAT ASSESSEE HAD TAKEN LOAN FROM BANKS AND OTHER PERSONS ON WHICH IT HAD PAID I NTEREST OF ` 40,44,198/-. HOWEVER, THE INTEREST RECEIVED BY THE ASSESSEE ON THE AMOUNTS ADVANCED BY HIM, AND ON DEPOSITS MADE IN BA NKS CAME TO ` 23,47,764/- ONLY. ASSESSEE HAD NETTED THESE TWO AM OUNTS AND AS PER THE A.O., ASSESSEES CLAIM FOR DEFICIT INTEREST SETTING OFF THE INTEREST EXPENSES AND INTEREST INCOME UNDER THE HEA D INCOME FROM OTHER SOURCES, COULD NOT BE ACCEPTED. HE WAS OF THE OPINION THAT THE LOANS HAVING NOT BEEN TAKEN FOR ANY BUSINESS PU RPOSES, THE PAYMENT OF INTEREST OF ` 40,44,198/- COULD NOT BE ALLOWED. A.O., THEREFORE, DISALLOWED SUCH NEGATIVE INTEREST OF ` 16,96,434/- AND THUS COMPLETED THE ASSESSMENT. 3. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT THERE WAS LOSS FROM INCOME FROM OTHER SOUR CES ON ACCOUNT I.T.A. NO. 734/MDS/11 3 OF A REASON THAT THE INTEREST PAID ON LOANS RAISED WAS HIGHER THAN THE INTEREST RECEIVED ON ADVANCES GIVEN TO PARTIES, OUT OF SUCH LOANS. ACCORDING TO THE ASSESSEE, HE WAS NOT ENGAGED IN AN Y BUSINESS OF MONEY LENDING BUT, LOANS WERE GIVEN TO M/S SKM SIDD HA AND AYURVEDHA COMPANY (INDIA) LIMITED IN WHICH HE WAS C HAIRMAN HOLDING 51% OF SHARE CAPITAL. AS PER ASSESSEE, THE AMOUNT WAS ADVANCED TO THE SAID COMPANY AT AN INTEREST RATE LO WER THAN THE INTEREST AT WHICH BORROWINGS WERE MADE BY THE ASSES SEE, FOR HELPING THE COMPANY FOR MEETING ITS URGENT NEEDS. IT WAS F URTHER ARGUED THAT INTEREST EXPENSES COULD NOT BE RESTRICTED ONCE NEXU S WAS CLEARLY PROVED. RELIANCE WAS PLACED ON THE DECISION OF HON 'BLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT (288 ITR 1 ). LD. CIT(APPEALS), HOWEVER, WAS NOT APPRECIATIVE OF THIS CONTENTION. ACCORDING TO HIM, ASSESSEE HAD BORROWED LOANS AT A RATE OF INTEREST OF 18% FROM ONE M/S SARAVANA FINANCE PRIVATE LTD., POLLACHI AND HIS OWN WIFE, AND ADVANCED SUCH AMOUNTS TO M/S SKM SIDD HA AND AYURVEDHA COMPANY (INDIA) LIMITED AT A RATE OF INTE REST OF 9%. LD. CIT(APPEALS) HELD THAT THE CASE OF S.A. BUILDERS LT D. (SUPRA) BEFORE HON'BLE APEX COURT WAS CLEARLY DISTINGUISHABLE. TH ERE WAS NO COMMERCIAL EXPEDIENCY IN THE LOANS GIVEN BY THE ASS ESSEE TO M/S I.T.A. NO. 734/MDS/11 4 SKM SIDDHA AND AYURVEDHA COMPANY (INDIA) LIMITED SI NCE ASSESSEE, ADMITTEDLY, WAS NOT ENGAGED IN ANY BUSINE SS. HE, THEREFORE, REJECTED THE APPEAL FILED BY THE ASSESSE E IN THIS REGARD. 4. NOW BEFORE US, LEARNED A.R. CONTENDED THAT THE Q UESTION OF COMMERCIAL EXPEDIENCY DID NOT ARISE UNDER SECTIONS 56 AND 57 OF INCOME-TAX ACT, 1961 (IN SHORT THE ACT) DEALING W ITH INCOME FROM OTHER SOURCES. ACCORDING TO HIM, SECTION 57 WHICH SPECIFIED DEDUCTION THAT COULD BE CLAIMED UNDER THE HEAD INC OME FROM OTHER SOURCES, CLEARLY MENTIONED AT CLAUSE (III) THAT EX PENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING SUCH INCOME WAS TO BE ALLOWED. RELYING ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF CIT V. RAJENDRA PRASAD MOODY ( 115 ITR 519), LEARNED A.R. ARGUED THAT PURPOSE OF THE LOANS ALONE WAS RELEVANT IN DETERMINING THE APPLICABILITY OF SECTION 57(III) OF THE ACT AND THE SAID CLAUSE DID NOT REQUIRE THAT DEDUCTION COULD BE CLAI MED ONLY IF INCOME WAS MADE OR EARNED. HE, THEREFORE, SUBMITTED THAT NETTING OF INTEREST DONE BY THE ASSESSEE WAS ALLOWABLE AS PER THE PROVI SIONS OF LAW AND THIS WAS UNJUSTLY DENIED. I.T.A. NO. 734/MDS/11 5 5. PER CONTRA, LEARNED D.R. SUBMITTED THAT ASSESSEE WAS EARNING SALARY FROM THE SAME COMPANY TO WHICH HE HAD ADVANC ED MONEY AND HE HAD GIVEN SUCH AMOUNT AT A LOWER RATE OF INTERES T THAN AT WHICH HE HAD BORROWED. THEREFORE, HIS CLAIM THAT EXPENDITUR E ON ACCOUNT OF INTEREST WAS FOR THE PURPOSE OF EARNING INTEREST IN COME, COULD NOT BE ACCEPTED. HE, THEREFORE, PLEADED THAT ORDERS OF TH E LOWER AUTHORITIES SHOULD BE CONFIRMED. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. THE DISPUTE IS REGARDING THE LOSS CLAIMED BY THE AS SESSEE BY NETTING OF THE INTEREST RECEIVED AND PAID UNDER THE HEAD I NCOME FROM OTHER SOURCES. THERE IS NO DISPUTE THAT ASSESSEE HAD BO RROWED MONEY FROM M/S SARAVANA FINANCE PVT. LTD., POLLACHI AND H IS OWN WIFE AT 18% AND HE HAD ADVANCED THE MONEY TO M/S SKM SIDDHA AND AYURVEDHA COMPANY (INDIA) LIMITED AT THE RATE OF IN TEREST OF 9%. THERE IS ALSO NO DISPUTE THAT THE ASSESSEE IS THE C HAIRMAN OF M/S SKM SIDDHA AND AYURVEDHA COMPANY (INDIA) LIMITED, H OLDING 51% OF SHARES THEREIN. THE REVENUE HAS NO CASE THAT AS SESSEE HAD ANY INTEREST IN M/S SARAVANA FINANCE PVT. LTD., POLLACH I FROM WHERE IT HAD RAISED THE LOAN. THAT LOANS RAISED FROM M/S SARAVA NA FINANCE PVT. I.T.A. NO. 734/MDS/11 6 LTD., POLLACHI WERE USED FOR GIVING LOANS TO M/S SK M SIDDHA AND AYURVEDHA COMPANY (INDIA) LIMITED, HAS ALSO NOT BEE N DISPUTED AND THUS, THE QUESTION OF NEXUS STANDS ANSWERED IN FAVO UR OF ASSESSEE. BECAUSE ASSESSEE HAD PAID INTEREST AT A HIGHER RATE THAN THE RATE AT WHICH HE HAD EARNED INTEREST INCOME FROM THE COMPAN Y WHERE HE HAD INVESTED THE BORROWED AMOUNT, THERE WAS A NEGA TIVE CLAIM OF INTEREST UNDER THE HEAD INCOME FROM OTHER SOURCES . THE QUESTION THEREFORE IS WHETHER WITH SUCH NEGATIVE CLAIM OF IN TEREST COULD BE ADMITTED UNDER SECTION 57 OF THE ACT WHICH SPECIFIE D THE DEDUCTION THAT COULD BE CLAIMED UNDER THE HEAD INCOME FROM O THER SOURCES. RELEVANT SUB-SECTION IS (III) WHICH MENTIONS THAT A NY OTHER EXPENDITURE WHICH IS NOT OF CAPITAL IN NATURE, LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING T HE INCOME FROM OTHER SOURCES SHALL BE ALLOWED AS DEDUCTION. SO, W E HAVE TO SEE WHETHER THE EXPENDITURE OF INTEREST WAS EXPENDED WH OLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING INTEREST FRO M M/S SKM SIDDHA AND AYURVEDHA COMPANY (INDIA) LIMITED. WE ARE OF T HE OPINION THAT THE DECISION OF HON'BLE APEX COURT IN THE CASE OF R AJENDRA PRASAD MOODY (SUPRA) WILL COME TO THE HELP OF THE ASSESSEE HERE. NO DOUBT, ASSESSEE MIGHT HAVE GIVEN THE MONEY TO THE SAID COM PANY BECAUSE I.T.A. NO. 734/MDS/11 7 OF THE FACT THAT HE WAS A SUBSTANTIAL SHAREHOLDER A ND ALSO CHAIRMAN THEREOF. HOWEVER, THE CONSIDERATION FOR GIVING THE ADVANCE WAS INTEREST AND SUCH INTEREST WAS FIXED AT 9%. REMOTE OBJECTS CANNOT DISPLACE THE PROXIMATE PURPOSE OF EARNING INTEREST INCOME. WE CANNOT SAY THAT LENDING OF THE MONEY TO M/S SKM SID DHA AND AYURVEDHA COMPANY (INDIA) LIMITED WAS NOT THE PURPO SE OF EARNING INTEREST. THE AMOUNT WAS NOT GIVEN AS SHARE APPLIC ATION MONEY OR AS INVESTMENT IN SHARES. SINCE THE MONEY RAISED BY TH E ASSESSEE FROM THE FINANCE COMPANY AND HIS WIFE WERE UTILIZED FOR GIVING LOANS TO M/S SKM SIDDHA AND AYURVEDHA COMPANY (INDIA) LIMITED, W E CAN SAY THAT NEXUS STOOD ESTABLISHED. A LOOK AT PAPER-BOOK PAGE 16 WOULD CLEARLY SHOW THAT LOANS TAKEN FROM SARAVANA FINANCE PVT. LTD. AS WELL AS LOAN TAKEN FROM MRS. M. KUTTILAKSHMI WERE USED F OR THE PURPOSE OF GIVING LOANS TO M/S SKM SIDDHA AND AYURVEDHA COMPAN Y (INDIA) LIMITED. THE TRANSACTION RELATING TO SUCH LOANS AN D FUNDS RAISED GIVEN HEREUNDER (PAPER-BOOK PAGE 16) WOULD CLEARLY ESTABLISH THE NEXUS:- I.T.A. NO. 734/MDS/11 8 DATE PARTICULARS AMOUNT BORROWED INVESTED 25.07.2007 LOAN FROM SARAVANA FINANCE 5 ,000,000 27.07.2007 LOAN TO SKM SIDDHA 5,000,000 29.09.2007 LOAN REPAID SIBLAL 3,000,000 23.11.2007 LOAN FROM SARAVANA FINANCE 5,000,000 26.11.2007 LOAN TO SKM SIDDHA 5,000,000 28.12.2007 LOAN REPAID FROM SKM SIDDHA 10,000,000 31.12.2007 LOAN R EPAID SARAVANA FINANCE 10,000,000 09.01.2008 LOAN REPAID FROM SKM SIDDHA 2,000,000 10.01.2008 LOAN FROM MRS. M. KUTTILAKSHMI 4,000,000 11.01.2008 LOAN REPAID SARAVANA FINANCE 5,000,000 18.01.2008 LOAN REPAID FROM SKM SIDDHA 3,000,000 21.01.2008 L OAN REPAID SBI 2,500,000 04.02.2008 LOAN REPAID MRS. M. KUTTILAKSHMI 1,000,000 21.02.2008 SYNDICATE BANK FD MATURED 20,000,000 WE ARE OF THE OPINION THAT ONCE NEXUS HAS BEEN ESTA BLISHED IN VIEW OF THE DECISION OF HON'BLE APEX COURT IN THE CASE O F RAJENDRA PRASAD MOODY (SUPRA), DEDUCTION UNDER SECTION 57(III) CANN OT BE DENIED TO THE ASSESSEE JUST FOR A REASON THAT IT WAS RESULTED IN A NEGATIVE FIGURE OR LOSS. THE QUESTION IS NOT WHETHER NETTING RESUL TED IN NEGATIVE FIGURE OR LOSS. THE QUESTION IS ONLY WHETHER THE I NTEREST PAID WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ADVANCING THE LOAN. 7. THERE COULD BE A CLAIM OF LOSS ALSO UNDER THE HE AD INCOME FROM OTHER SOURCES, IF THAT IS THE RESULT ON ALLOW ING THE CLAIM OF EXPENDITURE PROPER, HAS BEEN UNEQUIVOCALLY HELD BY HON'BLE APEX COURT IN RAJENDRA PRASAD MOODYS CASE (SUPRA). ON THIS ASPECT AS I.T.A. NO. 734/MDS/11 9 ALSO HOW SECTION 57(III) SHOULD BE INTERPRETED, OBS ERVATION OF LORDSHIPS AT PARAS 5 AND 6 OF THE SAID JUDGEMENT, R EPRODUCED HEREUNDER ARE VERY RELEVANT:- 5. IT IS ALSO INTERESTING TO NOTE THAT, ACCORDING T O THE REVENUE, THE EXPENDITURE WOULD DISQUALIFY FOR DEDUC TION ONLY IF NO INCOME RESULTS FROM SUCH EXPENDITURE IN A PARTIC ULAR ASSESSMENT YEAR, BUT IF THERE IS SOME INCOME, HOWSO EVER SMALL OR MEAGER, THE EXPENDITURE WOULD BE ELIGIBLE FOR DEDUC TION. THIS MEANS THAT IN A CASE WHERE THE EXPENDITURE IS ` 1,000, IF THERE IS INCOME OF EVEN RE.1, THE EXPENDITURE WOULD BE DEDUC TIBLE AND THERE WOULD BE RESULTING LOSS OF ` 999 UNDER THE HEAD INCOME FROM OTHER SOURCES. BUT IF THERE IS NO INCOME, TH EN, ON THE ARGUMENT OF THE REVENUE, THE EXPENDITURE 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 INT ENDED TO PRODUCE SUCH ILLOGICALITY. MOREOVER, IT MUST BE RE MEMBERED THAT WHEN A PROFIT AND LOSS ACCOUNT IS CASE IN RESPECT O F ANY SOURCE OF INCOME, WHAT IS ALLOWED BY THE STATUTE AS PROPER EX PENDITURE 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 PROPE R 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 APPRECIA TE HOW EXPENDITURE WHICH IS OTHERWISE AS PROPER EXPENDITUR E CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF IN COME. 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 ACCOU NTING AND THE INTERPRETATION OF S. 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF I.T.A. NO. 734/MDS/11 10 THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HE LD TO BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOM E. 6. IT IS TRUE THAT LANGUAGE OF S. 37(1) IS A LITTLE WIDER THAN THAT OF S. 57(III), BUT WE DO NOT SEE HOW THAT CAN MAKE ANY DIFFERENCE IN THE TRUE INTERPRETATION OF S. 57(III) . THE LANGUAGE OF S. 57(III) IS CLEAR AND UNAMBIGUOUS AND IT HAS T O BE CONSTRUED ACCORDING TO ITS PLAIN NATURAL MEANING AND MERELY B ECAUSE A SLIGHTLY WIDER PHRASEOLOGY IS EMPLOYED IN ANOTHER S ECTION WHICH MAY TAKE IN SOMETHING MORE, IT DOES NOT MEAN THAT S . 57(III) SHOULD BE GIVEN A NARROW AND CONSTRICTED MEANING NO T WARRANTED BY THE LANGUAGE OF THE SECTION AND, IN FACT, CONTRA RY TO SUCH LANGUAGE. 8. WE ARE, THEREFORE, OF THE OPINION THAT CLAIM OF THE ASSESSEE HAS TO BE ALLOWED. ORDERS OF LOWER AUTHORITIES IN THIS REGARD ARE SET ASIDE. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE STAN DS ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 13 TH JANUARY, 2012. SD/- SD/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 13 TH JANUARY, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-I, COIMBATORE (4) CIT-II, COIMBATORE (5) D.R. (6) GUARD FILE