TaxTMI 
TaxTMI 
2011 (9) TMI 101
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing in shares and money lending. The assessee had also made some investments and was the owner of a house property from which he was in receipt of rental income. b) The assessee used to borrow funds for the purpose of his business and used to pay interest on such borrowed sum to his creditors and claimed deduction in computing his business income. The particulars of the capital of the assessee, unsecured loans taken by him, investments made, loans given and stock-in-trade for the financial years ending on March 31, 1995, March 31, 1996, March 31, 1997 and March 31, 1998 are set out below : (Rupees in lac) 31.3.95 31.3.96 31.3.97 31.3.98 Capital 52.87 74.27 73.67 79.64 Loans Taken 53.80 53.12 98.88 30.95 Investments 61.38 55.71 66.79 63.39 Loans given 3.87 40.11 39.60 Nil Stock-in-trade 16.72 18.34 50.10 28.65 c) It would appear from the aforesaid tabulation that as on March 31, 1995, the assessee's capital was in excess of Rs.50 lakh and the total amount of loan taken by him was also in excess of Rs.50 lakh. The assessee had, however, given loa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he beginning of the year itself, the assessee received back the amount of Rs.39.60 lakh given by him to others as loan which and that amount was utilised by the assessee to pay off a part of the loan taken by him. Further, the assessee sold a substantial part of his stock-in-trade and utilised the sale proceeds for paying off some amount of unsecured loan, as a result, as on March 31, 1998, the unsecured amount of loan taken by the assessee stood reduced from Rs.98.88 lakh as on March 31, 1997 to Rs.30.95 lakh. As on March 31, 1998, there was no loan given by the assessee to anyone. Since the entire amount of loan given by the assessee was received back at the beginning of the year itself, he received interest of paltry amount of Rs.16,838/-. However, the assessee had to pay a sum of Rs.6.21 lakh in respect of the borrowed funds and claimed that the net amount of interest paid by him as calculated in the earlier years should be constituted as business expenditure. g) The Assessing Officer, however, by the order of assessment held that the interest paid by the assessee was not a business expenditure and disallowed the net interest of Rs.6,03,930/- in computation of the business i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee filed details of such loans. From the details, it is found that the assessee obtained substantial amount of loan from various parties and at the time of substantial amount of loans were given to different parties. It is also found that loans were not given for the sake of business transactions but simply the loans taken were transferred to the parties by way of loan. The assessee acted as conduit of such loan transactions. However, the assessee debited substantial amount of interest, but very negligible amount of Rs.26,782/- was recovered from the loan given against loan of Rs.6,20,747/- debited to the P&L A/c. From the Balance Sheet it is also found that the interest so debited is not related to the business transactions. Out of Rs. 98,88,315/- i.e. the balance standing on 31.03.97 which is carried over to this asstt. Year an amount of Rs.12,50,000/- has been utilised for the purchase of shares. It is also noted that in some cases, loans were almost transferred to other parties on the same date of receipt. For the sake of convenience, the loan transactions particularly immediate proceeding asstt. Year may be summarised as follows:- Name of the parties from whom loan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h borrowings. During the year under appeal, the appellant sold few shares and out of sale proceeds the money was returned to the loan creditors. The appellant also received back the amount from loan debtors and was returned to the loan creditors. The appellant to keep the commitment for payment to loan creditors has to take loans from fresh parties and paid interest. In all cases the appellant charged and paid interest whatever the case may be. Thus, after sale of shares and fresh loan transactions the net result as per balance sheet stood as under:- ------------------------------------------------------------------------------------------------- Asstt. Year 1997-98 ------------------------------------------------------------------------------------------------- Loans and advances 98,88,315 stock in shares 50,09,860 ------------------------------------------------------------------------------------------------- Interest paid 15,82,633 &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....actions but simply the loans taken were transferred to the parties by way of a loan is not correct. His conclusion that the appellant acted as conduit of such transactions is also not without any base. There was transfer of loans from one party to another party and it remained for the purpose of business. The AO has not understood the two separate business of the appellant in which as per the balance sheet the investment in shares and the other business, trading stock in shares are shown separately from year to year. The interest was claimed only for business purpose and not for investment in shares. Therefore, the net interest claimed as expenditure at Rs.6,03,930/= disallowed by the AO is allowable expenditure and is, thus, allowed." (Emphasis supplied by us). On an appeal by the Revenue, the Tribunal below, however, set aside the order of the CIT (Appeals) and restored the one passed by the Assessing Officer by making following observations: "7. We have heard the rival submissions and perused the records, we have noticed that the A.O. found that the assessee obtained substantial amount of loan various parties and at the same time substantial amount of loans was given to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted as conduit of such loan transactions". In making such observations, the Assessing Officer totally overlooked the fact that the assessee being also a money lender is entitled to receive interest from the loan advanced by him as his profit and at the same time, is at liberty to take loan for running the money lending business. There is no prohibition of taking loan for running a money lending business and an assessee is lawfully entitled to deduct the interest paid on such loan as business expenditure as provided in the Act. It is not the law that money lending business must be run out of one's own money without taking loan from others or that interest paid on loan for running such business is not allowable as business expenditure. Even the interest received by the assessee for the last three years has not been treated as income from other source but has been included within the business income of the assessee. Thus, the various transactions of granting and taking loan by the assessee not having been disbelieved and being supported by the profit and loss account of the previous years, the assessment of which had attained finality, the Assessing Officer illegally refused to all....