TaxTMI 
TaxTMI 
2014 (12) TMI 336
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....he case and material brought on record by the Assessing Officer that the funds advanced to the sister concerns were for business purposes is not true as all the firms/companies (it whom advances were given by assessee) were independent entities and the assessee firm does not have any control over their affairs. Hence the purpose of utilization of funds either for business or non-business purposes cannot be certified by the assessee. 1 (b) In doing so the Ld. Commissioner of Income Tax (Appeals)-I, Kanpur had erred in law and on facts in not appreciating the fact that the argument of the assessee that it has charged interest @12% is not correct particularly because in the aforesaid two cases of sister concerns viz. (1) M/s Kailash Auto Finance Ltd. (2) M/s Kailash Motors (India) Ltd., no interest has been charged by the assessee despite huge debit balance were standing against them. 1(c) The view of the Ld. Commissioner of Income Tax (Appeals) is not acceptable as in the recent judgment of Hon'ble High Court Kerala in the case of CIT Vs M.M. Nagalinga Nadar Sons reported in (2009) 222 CTR 518 (KER), wherein the Hon'ble High Court has held that "the assessee which advan....
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....ided vide reply dated 27.6.2005, there are 1551 depositors during the year. As per the details filed and particulars of balance sheet of the year, the assessee has made following investments :- S. No. Nature of investment Total investment Investment during the year (a) Investment in shares of sister Rs.4,58,75,850/- Rs.3,50,60,700/- (b) Advances recoverable in cash/kind (from sister concerns) Rs.8,85,20,483/- Rs.3,00,99,839/- (b) From the clause of partnership deed it may be seen that the assessee does not have any business of sale and purchase of shares. Neither the partnership deed authorizes borrowing of funds for the purpose of making loans/advances nor making investments in equity shares of companies. (c) Assessee vide his reply dated 06.03.2006 has submitted as under:- "With regards to your honour's requirement to explain the revenue realized out of investment made in the shares of sister concerns, it is submitted that no dividend was declared by them during the year". (d) Assessee vide reply dated 6.3.2006 has submitted regarding the confirmations of the depositors as under:- "Balance confirmations from the dep....
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....per schedule-8 of P & L A/c., the assessee has shown interest income of Rs. 94,40,177.27 (including interest from partners amounting to Rs. 17,05,585/-), from lam and advances to sister concerns and partners comprising loans and advances for the purpose other than the business and dividend of Rs. 11,250/-. The total yield therefore, comes Rs. 94,51,427.27. In view of the facts discussed above the excess claim of interest by the assessee becomes as under : Rs.1,79,44,845.50 - Rs. 94,51,427.27 =Rs.84,93,418.23 (g) It is worth to mention that the provisions of section 36(1) (in) of I. Tax Act, 1961 mentions, "the amount of interest paid in respect of Capital borrowed for the purpose of 'the' business or profession". Article 'the' used before business has emphasizing effect. It clearly speaks of, for the particulars business for which the capital has been borrowed. In view of above findings and legal standings and as per observations made in par-12, the interest which is not for the business purpose comes to Rs. 84,93,418/- will be disallowed and added in the income of the assessee. Reliance is made on 187 ITR 363 (Alld) in the case of CIT Vs. H.R. Sugar Factories....
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....s objectives. During the year the appellant has paid interest on the public deposits and borrowings which shows that substantial amounts of funds have been borrowed for business purpose. The appellant has stated that during the current year out of investment of Rs. 3,50,60,700/-, Rs. 3,50,00,000/- was made against settlement of old dues and no fresh fund was involved in these investments. Finally, the AO has held that since investment is not the business activities of the appellant, therefore, these investments in shares are treated as advance in the nature of diversion of funds to sister concerns without charging any interest. No dividend has been received during the year on these shares, is also a tact which has been relied upon by AO. It is noticed that the AO has not appreciated the "business connection" with the sister concerns and "commercial expediency", as argued by the appellant in respect of these transactions of investment. This aspect is important in the context of section 36 of the I.T. Act under which the claim of (Induction of interest is made by the appellant. The ratio and decision in the case of CIT vs. Dalmia 254 ITR clarifies the position on this issue where it ....
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.... and in current year major part of the investment is made against settlement of old dues, I am unable to find a nexus between the borrowed capital and amount invested in the earlier years and current year also in the share of sister concerns. Accordingly, the finding of the AO that the interest bearing fund was directed for investment is not proved. The decision in the case of CIT vs. Gopi Krishna 47 ITR had laid the correct ratio where it was held that "Department is not entitled to disallow interest paid unless there is a evidence to show that a particular amount borrowed was utilized for private purposes". 10. Finally, it is also seen that the AO has considered the investment in shares of the sister concerns as advance by looking into the substance of the transactions. The only basis for reaching this conclusion is that the appellant is not an investment concern and no dividends have been received during the year. I would observe that it was a hasty and general conclusion reached by AO because the distinction between "investment" and "advance" is very wide and both are two different transactions. The transacting parties have entered the transaction as investment which is prop....
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....nvestment in shares is concerned, dividend income is taxable till this year i.e. assessment year 2003-04 and therefore, even if any interest expenditure is incurred on borrowing utilized for making investment in shares, the same is allowable either under section 36(1)(iii) of the Act, if making investment in shares is a business activity of the assessee and otherwise, the same is allowable as deduction under section 57(iii) of the Act, because in that situation, the dividend income is taxable as income from other sources and accordingly, expenditure is allowable under section 57(iii) of the Act. It is immaterial whether any dividend income was earned in this year or not in view of the judgment of Hon'ble apex court rendered in the case of Rajendra Prasad Moody as reported in 115 ITR 519 (SC). 11. Regarding advances to sister concerns and partners, we find that it is noted by the Assessing Officer in the assessment order at page 6 that on advances to sister concerns, interest has been charged by the assessee except advances to two sister concerns i.e. Kailash Auto Finance Ltd. and Kailash Moser Industries Pvt. Ltd. The amount of advances to Kailash Auto Finance Ltd. was only ....
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....the ld. A.R. of the assessee rendered in the case of S. A. Builders Ltd. vs. CIT (supra). For the sake of ready reference, we reproduce the relevant Paras of this judgment of the Hon'ble Apex Court viz. Paras 32 to 38, which read as under:- "It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to th....
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.... money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. We also make it clear that we are not setting aside the order of the Tribunal or other income-tax authorities in relation to the other points dealt with by these authorities, except the point of deduction of interest on the borrowed funds." 17. In the above Paras of the judgment of the Hon'ble Apex Court, it is seen that it is noted by the Hon'ble apex Court in that case that in fact, borrowed amount in question was not utilized by the assessee in its own business but has been advanced as interest free loan to sister concern. It was held that this fact is not relevant and it was held that what is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency....
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....nces. It is the assertion of the assessee that borrowing as well as giving advances to sister concerns was at same interest rate of 12%. This assertion of the assessee and finding of the ld. CIT (A) could not be controverted by the ld. D.R. of the Revenue and hence, considering all these facts, we decline to interfere in the order of the ld. CIT (A) in this year by respectfully following this judgment of the Hon'ble Apex Court rendered in the case of S. A. Builders Ltd. vs. CIT (supra). 21. In the result, this appeal of the Revenue is dismissed. 22. Now we take up the appeal of the assessee for assessment year 2003-04 i.e. I.T.A. No.12/LKW/2011. 23. Grounds raised by the assessee are as under:- "1. Because the CIT(A) has erred in law and on facts in not considering the written submissions and evidences filed during the course of hearing and has thereby erred in upholding an addition of Rs. 2,50,000/- as Unexplained Deposits u/s. 68 of the Act, 1961. 2. Because the authorities below have erred in law and on facts in making addition of Rs. 2,50,000/- on account; of 'Unexplained Deposits in the case of following depositors:- Name Amount a) Mr. Anand Sth....
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....nd going through the orders of the authorities below, we find that out of total four deposits, one deposit of Rs. 1.10 lakhs of Mr. Anand Saptak is on account of renewal of old FDRS and therefore, addition on account of this deposit is not justified at all. 27. Regarding other three deposits also, we find that the assessee has filed confirmation of these three persons also and the Assessing Officer has allowed interest expenditure incurred in respect of these four depositors. We fail to understand that when interest expenditure incurred on these deposits is allowed by the Assessing Officer, how it can be said that deposit itself is bogus. We also find that it is noted by the Assessing Officer at page 12 of the assessment order that as per list of fresh deposits, there are 1551 deposits during the year amounting to Rs. 4.37 crores. It is also noted by the Assessing Officer that assessee was required to file confirmation from the depositors. This is also noted by the Assessing Officer that random enquiry was also made in certain cases of depositors and certain discrepancies were noticed, which were brought to the knowledge of the assessee and assessee was asked to clarify the disc....
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....er noted that this bank certificate shows the repayment of Rs. 11,090/- against the deposit of Rs. 20,000/- claimed by the assessee. On this basis, he noted that no nexus is proved between the two transactions. Considering this, we are of the considered opinion that addition made by the Assessing Officer is justified. 32. Hence, out of this total addition of Rs. 2.50 lakhs, we delete the addition of Rs. 1.10 lakhs of Mr. Anand Saptak and confirm the balance deposit of Rs. 1.40 lakhs. 33. In the result, appeal of the assessee is partly allowed. 34. Now we take up the appeal of the Revenue for assessment year 2004-05 in I.T.A. No.180/LKW/2010. Grounds raised by the Revenue are as under:- "1 (a) The Ld. Commissioner of Income Tax (Appeals)-I, Kanpur has erred in law and on Facts in deleting the addition of Rs. 56.64,137/- made by the Assessing Officer on account of disallowance of interest paid by the assessee firm to Others and banks without appreciating the facts of the case and material brought on record by the Assessing Officer that the funds advanced to the sister concerns were for business purposes is not true as all the firms/companies (it whom advances were given b....
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....same are reproduced herein below:- "13. I have considered the facts and circumstances of the case, the reasons noted by AO for disallowance and the arguments of the appellant. It is seen from the facts that the appellant has invested in the shares of the sister concerns companies to the extent of Rs. 7,97,64,380/- in total over past years and Rs. 3,38,88,530/- in the current year. The AO has noted that this investment cannot be said to have been made for the business purpose. The AO has also noted that the investment in shares is not the business activity of the appellant as per its objectives. During the year the appellant has paid interest on the public deposits and borrowings which shows that substantial amounts of funds have been borrowed for business purpose. Finally, the AO has held that since; investment isGBP not the business activities of the appellant, therefore, these investments in shares are treated as advance in the nature of diversion of funds to sister concerns without charging any interest. No dividend has been received during the year on these shares, is also a fact which has been relied upon by AO. It is noticed that the AO has not appreciated the "business co....
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....ontrarily, it has been reiterated that the investment had been made out of profit of earlier years. The AO has also noted only Rs. 3,38,88,530/- invested during the current year where as the balance amount of Rs. 4,58,75,850/- relates to earlier years. Considering the facts that the appellant had business profit in the earlier years and a part of the investment is made in the earlier years, I am unable to find a nexus between the borrowed capital and amount invested in the earlier years. Accordingly, the finding of the AO that the interest bearing fund was directed for investment is not proved. The decision in the case of CIT vs. Gopi Krishna 47 ITR had laid the correct ratio where it was held that "Department is not entitled to disallow interest paid unless there is a evidence to show that a particular amount borrowed was utilized for private purposes". 15. Finally, it is also seen that the AO has considered the investment in shares of the sister concerns as advance by looking into the substance of the transactions. The only basis for reaching this conclusion is that the appellant is not an investment concern and no dividends have been received during the year. I would observe ....
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.... addition was deleted by him on the basis that the Assessing Officer has not appreciated the business connection with the sister concern and commercial expediency as argued by the assessee in respect of these transactions of investment. He has noted in Para 13 of his order that deduction was claimed by the assessee u/s 36 (1) (iii) of the I. T. Act. Thereafter it is noted by CIT(A) in para 14 of his order that it cannot be said that the amounts invested by assessee are for non business purpose, though same may be indirect business connection. We are of the considered opinion that having business connection is different thing and making investment for business expediency is different thing altogether. In the present case, this is the only claim of the assessee before the Assessing Officer and before us also that the investments made by the assessee in sister concerns who are engaged in a connected or similar business. Even if this is correct then also, it cannot be said that this investment in sister concern is for business purpose or for business expediency. Hence, the judgment of Hon'ble apex court rendered in the case of S. A. Builders (Supra) is not rendering any help to the....
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....e 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 would 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 where the expenditure 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 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 intended to produce such illogicality. Moreover, it must 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 expe....
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....al income under this Act. Hence, it has to be first established by the assessee that deduction on account of interest is allowable under some provisions of the Act. In our considered opinion, in the facts of the present case, interest is not an allowable expenditure under any provision of the Act. It is definitely not allowable for computing salary income or income from house property. It cannot be said that deduction on account of interest expenditure is to be allowed for computing income from capital gain since income on account of capital gain is taxable because deduction on account of interest expenditure is not allowable for computing capital gain. For computing capital Gain, deduction is allowable in respect of cost of acquisition, cost of improvement and cost of transfer only and interest does not fall in any of these three categories. From A.Y. 2004 - 05, it is not an allowable deduction u/s 57 (iii) i.e. for computing Income from other Sources also because, deduction is allowable under this section for those expenses which are incurred for earning an income taxable under the head income from other sources. Since now dividend income is not taxable under this head, deduction....
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....he present year or not. In this regard, we are aware that there are Tribunal decisions as well as the judgment of Hon'ble Allahabad High Court also that if there is no dividend income actually earned then no disallowance can be made u/s 14A but in these judgments, the judgment of Hon'ble Apex Court rendered in the case of Rajendra Prasad Moody (supra) was not brought to the notice of the tribunal and Hon'ble High Court and hence, it was not taken note of. It was also not taken note of that even if it is held that no disallowance is to be made u/s 14A of the Act, then also, there has to be a positive finding that under which section, this interest expenditure is allowable. Since dividend income is not subject to tax as income from other sources from assessment year 2004-05, it cannot be said that interest expenditure has to be allowed u/s 57(iii) of the Act. This is also not a case of the assessee that investment in shares was made out of borrowed funds in course of dealing in shares and therefore, interest expenditure is allowable u/s 36 (1) (iii) of the Act. We have already seen that interest income is not allowable while computing capital gain. Hence, even if it is he....
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....made out of fund available in the form of sundry creditors. 43. As per above discussion, we have seen that interest expenditure incurred by the assessee by borrowing funds for making investment in shares is not allowable from assessment year 2004-05 because the dividend income is not taxable income under the head income from other sources and therefore, deduction is not allowable u/s 57(iii) of the Act. We have also seen that no deduction is allowable u/s 36 (1) (iii) also. Hence we reverse the order of learned CIT (A) and restore that of the A.O. Regarding various judgments cited by the learned AR of the assessee including the judgment of Hon'ble apex court rendered in the case of S. A. Builders (Supra), we would like to observe that no judgment is rendering any help to the assessee because we have seen that deduction is not allowable under any provisions of any section of Income Tax Act. Hence, there is no need to disallow any expenses which is not allowable. In fact, the assessee has failed to make out a case that deduction of interest expenditure is allowable under the provisions of any section of Income Tax Act, 1961. 44. In the result, the appeal of the Revenue stan....
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....he Assessing Officer under section 143(3) be restored. 5. That the appellant craves to modify any of the ground of appeal mentioned above and/or to add any fresh grounds as and when it is required to do so." 46. Both the sides agreed that the facts and the issue involved in the present year is identical to the facts and issue involved in the assessment year 2004-05 and the same can be decided on similar line. In assessment year 2004-05, this issue has been decided by us in favour of Revenue. Accordingly, in the present year also, we reverse the order of CIT (A) and restore that of the Assessing Officer. 47. In the result, the appeal of the Revenue stands allowed. 48. Now we take up the appeal of the Revenue for assessment year 2006- 07 i.e. I.T.A. No.157/Lkw/2010. 49. It was agreed by both the sides that ground No. 1 to 3 are same as per Revenue's appeal in assessment year 2004-05 and 2005-06 and the same can be decided on similar line. In assessment year 2004-05 and 2005-06, these issues have been decided in favour of the Revenue. Accordingly, in the present year also, these grounds of the Revenue are allowed. 50. Regarding ground No. 4, Learned D.R. of the R....
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.... 07 i.e. I.T.A. No.181/Lkw/2010. In this appeal the assessee has raised the following grounds: "1. Because the CIT(A) has erred on facts and in law in confirming the addition of Rs. 1,45,560/- made @2% of the total sales on account of low gross profit. 1.1 Because there being no defects or discrepancies in the books of accounts, purchase and sales having been accepted, the authorities below were not justified in making the addition of Rs. 1,45,560/- by applying a percentage of profit on the sales. 1.2 Because the authorities below have failed to appreciate the explanation furnished by the assessee, and have arbitrarily made the addition of Rs. 1,45,560/-. 1.3 Because the accounts being tax audited and there being no change in the system of accounting regularly followed, as well as the explanation for the decline of slight gross profit rate having not been found false, the authorities below were not justified in rejecting the trading results and making the addition of Rs. 1,45,560/-. 2. Because the CIT(A) has erred on facts and in law in confirming the addition of Rs. 93,89,908/- being disallowance of interest vis-a-vis investment by applying the provisions of section....
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....e Act if the related income is not taxable. We have already held that deduction on account of interest expenditure in respect of borrowing for making investment in share is not allowable under any provisions of the Act in the facts of the present case. We have given a finding that this expenditure is not allowable u/s 57(iii) of the Act because now dividend income is not taxable as income from other sources. We have already given a finding that the deduction for making investment in shares is not allowable for computing capital gain. We have also given a finding that since the assessee is not dealing in shares, the deduction on account of interest is not allowable u/s 36(1)(iii) of the Act. Hence, we hold that in the facts of the present case, the disallowance has to be made in full because the same is not allowable under any provisions of the Act. Hence, we uphold the disallowance confirmed by CIT(A) and the part relief allowed by CIT (A) is already reversed while deciding the appeal of the revenue for this year. Ground No. 1 & 2 of the assessee are rejected. 57. Regarding ground No. 3 of the assessee's appeal, Learned A.R. of the assessee reiterated the same contentions ma....