TaxTMI 
TaxTMI 
2013 (1) TMI 425
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.... 2(i). That on the facts and circumstances of the case, the lower authorities were not justified in not accepting claim of interest amounting to Rs. 29,34,984/- by making reference to provisions of sec. 14A, 36(1)(iii) and 34B. (ii). That claim of interest is permissible deduction under the law and there is no valid basis for disallowance of the same." 3. Brief facts giving rise to this appeal are that the assessee's case was selected for scrutiny and a notice u/s 143(2) of the Income Tax Act, 1961 (for brief the Act) was issued and served on the assessee. During the assessment proceedings, the assessee's representative contended the proceedings but did not produce the books of account and vouchers, hence, in absence of books of account and vouchers pertaining to expenses claimed in P&L account, the Assessing Officer disallowed the expenses and added back to the income of the assessee. The Assessing Officer also disallowed the credits shown in the balance sheet u/s 68 of the Act and added back to the income of the assessee. The Assessing Officer finalized the assessment with the taxable income of Rs.1,86,48,070 as against the returned negative i....
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....n sale of imported car was of capital loss. Hence, the same cannot be charged to P&L account because the imported car was not a part of block of asset and the same cannot be allowed as revenue loss. Accordingly, we are unable to see any reason to interfere with the impugned order in this regard. In the result, ground no. 1 is dismissed. Ground No.2 9. Apropos ground no.2, the assessee's representative submitted that the authorities below were justified in not accepting the claim of interest amounting to Rs.29,34,984 by making reference to provisions of sec. 14A, 36(1)(iii) and 43B(d) of the Act. The assessee's representative submitted that the claim of interest was permissible deduction under the law and there was no valid reason or basis for disallowance of the same before the authorities below. The AR also submitted that the Commissioner of Income Tax(A) wrongly applied the ratio of judgment in the case of Metro Exporters Ltd. vs ITO (2009) 29 SOT 531 (Mumbai). The assessee's representative vehemently submitted that the total interest claimed by the assessee was debited to Profit & loss account. Thus, it should be allowed as revenue expenditure for the purposes of business ....
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.... that the same have been incurred for business purposes. The AR submitted that the finance charges include bank charges and Interest on loan taken by the firm which it is using and claiming as expense from the date of sanction. The confirmation of loan from the bank was also filed. It has been admitted by the AR that the appellant has not paid the Interest payable there on till now, so the bank has put this advance as NPA. Now, the matter is pending in the Recovery Tribunal. 5.1 The balance sheet of the assessee reveals that the assessee has Invested Rs. 1,05,39,000/- in shares and advanced Rs. 80,11,229/- to its sister concerns. These investments and advance do not generate any income chargeable to tax. The AR has submitted the copy of the assessment order for AY 1994-95 In support of his claim that the investments in shares have been done out of capital of the firm and not from the bank loan. The loan and 0D in aggregate relevant for this year is Rs. 1,63,36,132/-. Accrued interest thereon is Rs. 34,60,386/-. 5.2 I have carefully considered the submission of the AR and perused the case record. In this case, this disallowance is justifie....
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....le in total income. Therefore, the very existence of sub-section (3) of section 14A shows the legislative intention to disallow expenditure in relation to income not includible in total income. This can be well understood by an example: A situation may arise where an assessee engaged in various business activities including Investment in shares may take Interest bearing loan for investing in shares of its group company, which would never declare dividend and the assessee can claim interest payable against that loan against its other business receipts. But it is not justified as it is not the Intention of the legislature. If provisions of law contained under section 14A and diction of section 14A is perused, It Is clear that section 14A codifies the well accepted principle of taxation that if income Is not taxable, no expenditure either direct and or indirect what so ever, in relation to such income can be med against taxable income. The section 14A codifies the well-recognized principle of taxation which is as per norms of accountancy and law which may be culled out from various decisions of the Hon'ble Courts and it encompasses any expenditure incurred in relation to income which ....
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....or earning non-taxable income. Further, interest free advances to sister concerns and investments in shares has created interest liability In the year of borrowal and in subsequent year, which is against the object of section 36(1)(iii). Following the decision, Metro Exporters ltd. v. ITO (2009) 29 SOT 531 (Mum.), it is hereby held that the interest paid on borrowal to the extent of advances and investment in shares is not allowable 36(1)(iii) of the Act. Further, this Interest is also not allowable u/s 43B(d) of the Act. 5.7 The total interest debited In the P&L account is Rs. 29,34,984/-. Thus, following the judgments In the case of Dagga Capital, special bench, Metro Exporters ltd (supra) and provisions of sections 14A, 36(1)(iii) and 43B, I hereby upheld the disallowance of interest of Rs 29,34,984/-." 13. The assessee's representative relied on the judgment of ITAT, Kolkata, Third Member Bench in the case of S.P. Jaiswal Estate P. Ltd. vs Commissioner of Income Tax reported as (2012) 74 DTR (Kolkata) T.M. (Tribunal) 294 wherein it was held that interest on borrowed capital claimed as business expenditure and at the same time where the assessee has adva....
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....ken by the assessee and its purpose is also not disclosed by the assessee either before the authorities below or before us. 17. From the concluding part of the impugned order pertaining to this ground reveals that the CIT(A) followed the judgment of Metro Exporters Ltd. Vs ITO (2009) 29 SOT 531 (Mumbai). In the case of Metro Exporters (supra), the assessee company borrowed money from a company belonging to the same group and interest paid on such borrowing was disallowed by the Assessing Officer for the reason that the assessee had given interest free loans to another allied concern. In this judgment, it was clearly held that so long as the amount borrowed is used for business, then interest paid on such loans is eligible to be deducted while computing the income from business. Clarifying the object of Section 36(1)(iii) of the Act, it was also held that this provision is not to enable the assessee to make large borrowings and create interest liability in the year of borrowal and subsequent years on one side and to divert the borrowed funds by giving interest free loans to its group concern, relatives and personal use of the assessee. In the case of Metro Exports Ltd. (supra), i....
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....t was the position of claims and their allowance is also not before us. Therefore, it would not be appropriate to take AY 1997-98 as a rule of consistency in the present appeal for AY 2003-04. 21. In view of above, the assessee has relied on the judgment of Hon'ble Punjab & Haryana High Court in the case of Commissioner of Income Tax vs Hero Cycles Ltd. reported as 323 ITR 518 (P&H) wherein their Lordships have held that the expenditure on interest was set off against the income from interest and the investment in the shares and funds out of dividend proceeds, and in view of this finding of fact, disallowance u/s 14A was not sustainable, therefore, this judgement was given in a peculiar circumstance and fact when the assessee set off the expenditure on interest against the income and dividend proceeds, it was held that further disallowance u/s 14A of the Act was not sustainable. But in the present case, we are unable to see any factual situation that the assessee has set off interest expenditure (financial charges) against the tax free income from interest and dividend proceeds raised through investment. Therefore, we respectfully hold that the benefit of the ratio of this judge....
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....has to be allowed as a deduction in computing the income under section 28 of the Act. In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC) ; AIR 1979 SC 1291, this court held that the expression 'for the purpose of business' occurring under the provision is wider in scope than the expression 'for the purpose of earning income, profits or gains', and this has been the consistent view of this court. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister con-cern (a subsidiary) as interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is 'for the purpose of business' It has been consistently held in the decisions relating to section 37 that the expression 'for the purpose of business'....
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....rd party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act." 24. The DR also submitted that in the case of Bharati Televenture (supra), the Hon'ble Delhi High Court held that where the assessee was maintaining a bank account with mixed common funds from which all deposits and withdrawals were made, then if there was no specific instance observed by the AO showing a direct nexus between the borrowed funds and the advances made to the subsidiaries, then when pointing out any specific instance on the basis of general observation and without establishing the fact that the borrowings made by the assessee was not for the business purpose, the disallowance is not sustainable. The DR further submitted that in the present case, the situation is different because the assessee has taken interest bearing loans and at the same time he has voluminous investment in shares/securities which accrue in tax free income in the hands of the assessee. 25. On careful consideration of above submissions and citations before us, in the cases of S.A. Builders (supra) and Madhav Prasad Jatia (supra), the Hon'ble Apex Court held that the authorities shou....
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....otal income. 8. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable' to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction. 9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show b....
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....ely in managing and supervising huge investment of Rs.1,05,39,000 in various shares in earlier years and the same was brought forward to the year under consideration. 32. In view of discussion hereinabove, we finally observe that the onus was on the assessee to establish his claim of financial charges/interest u/s 36(1)(iii) of the Act to prove the fact that interest bearing loans were taken for business and indeed used for the same purpose and interest free loans were advanced from surplus funds or under business expediency and if the assessee does not prove or fails to prove that the deduction is admissible, then the inference goes against him/her. Once the assessee has discharged the initial onus to prove that the deduction is allowable, the onus that deduction is not admissible shifts to the tax authorities. 33. In the case in hand, since this fact is not in dispute that the assessee did not submit books of account and vouchers before authorities below to show that the interest bearing loans were taken for business purpose and indeed used for the same and investment which accrue tax free income were made from difference source of funds and which has no relation to interes....