AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (2) TMI 113
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..... 3. The assessee individual filed his return on 31-07-2001 stating income of Rs. 13,28,020/- from salary and other sources. The Assessing Officer completed a regular assessment on 29-03-2004 disallowing impugned interest expenditure claimed against fixed deposits income of Rs. 22,50,000/- held with Oriental Bank of Commerce, Surat declared under the head other sources. The CIT(A) reversed the Assessing Officer's action. The Revenue filed ITA 550/Ahd/2005 before the tribunal. A co-ordinate bench in its order dated 11-09-2008 remitted the issue back to the assessing authority. 4. The Assessing Officer took up consequential proceedings. He was inter alia of the view that the assessee's interest claim of Rs. 10,38,237/- in question i.e. Rs. 5,15,245/- paid to the bank on current a/c. No. 91890 and Rs. 5,22,986/- pertaining to Shri Shyam K. Agrawal @ 10.5% on unsecured loans of Rs. 90 lacs did not have any nexus with the above stated interest income declared under the head other sources u/s. 57 of the Act. He accordingly disallowed the same in consequential order passed on 24-12-2009. 5. The assessee preferred an appeal. The CIT(A)'s order relevant to the issue in hand reads as unde....
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....owing along with the extract of the balance sheet as on 31.03.2001 as under :- From the above balance sheet, your honour would appreciate that the total interest free funds available with me is Rs. 4,80,61,281/~ in the form of capital and interest free unsecured loans, which, which is far in excess of the interest free advances of Rs. 1,49,99,350/- as alleged in the reasons for reopening reproduced in Para.4.3 herein above. Hence, out rightly, it is submitted that in the vent of interest free funds far exceeding the interest free advances, the very basis of reopening the assessment is erroneous and ab-initio bad-inlaw. Your good self may note that I am a promoter shareholder in Alpha Plastomers Pvt. Ltd. and Alpha Packing Ltd. During the year under consideration , I had borrowed Rs. 95 Lacs from Shyam K. Agarwal on interest of 10.5% p.a. and also availed temporary overdraft on bank FD for making investment as seed capital in Alpha Plastomers Pvt. Ltd. being a promoter of the said company since all my other funds were blacked and not liquid. Thus, out of business compulsion, the interest funds were borrowed by me. Your goodself may further note that the amount invested i....
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....ot only erroneous on facts of the case but also in the eyes of the law. (iii) Interest expenses is incurred with the objective of preserving the income earning asset:- Over and above, the aforesaid facts, the erstwhile AO was also explained the fact that during the year under consideration, I had a fixed deposit of Rs. 2 Crores with the Oriental Bank of Commerce(OBC), however, in order to make business investment, I did not want premature encashment of the said fixed deposit since the bank interest rates were falling and such withdrawal would have resulted into severe fall into my earnings and therefore, out of commercial expediency and prudence, I instead of prematurely encashing the said P.P. availed loan against the security of the same whereby I preserved higher income earning assets and incurred liability of a much lower extent. The business prudence and commercial expenditure gets clearly reflected from the fact that by preserving the bank P.P. I have been able to earn net interest income of Rs. 12,11,769/- ( interest income of Rs. 22,50,000/- less interest paid to Shyam K. Agarwal of Rs. 5,22,986/~ and interest paid on bank overdraft of Rs. 5,15,245) and if I had pr....
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....re rebutted herein after. (i) The erstwhile AO has held that the decisions referred to by the assessee are on business expenditure as provided in section 36(i)(iii) whereas, in the assessee's case there is no business activity but income from other sources and hence his case is governed by the provisions of section 57(iii). The aforesaid observation of the erstwhile AO is absolutely erroneous since the judicial pronouncement in the case of J.D. Italia v. ITO (1986) 17 ITD 154 (Hyd) as relied upon by me is in respect of section 57(111) and not section 36(i)(iii). However, the erstwhile AO has not discussed the said judgement in his assessment order for the reasons best known to him. Here, reliance is also placed on the following decisions in respect of section 57(iii). (a) The Hon.'ble Karnataka High Court in the case of Venkateshwara Real Estate & Enterprises (P) Ltd. v. CIT (1985) 151ITR 729 (Ker)has held that any expenditure incurred for maintaining the source of income is deductible u/s. 57(iii). The Hon'ble Court has further held that the connection between income and expenditure need not be direct but may even be indirect. (b)The Hon'ble Bomba....
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....ions 56 & 57 and Section 37 of the Act to establish that the appellant under the shelter of investment in a partnership firm and in a company wherefrom the taxable income shall be earned in future. He has discussed about the setting up an industry and set of interest expenses during the period of set up of industry and commencement of business, whereas, the arguments advanced by the AR of the appellant is fully justifiable as the appellant has hit own capital worth Rs. 4,08,20,481/-and the interest-free loans worth Rs. 72,40,800/-. Therefore, the appellant has in aggregate interest-free fund available with him stands to 4,80,61,281/-. As against the said interest-free funds, the AO has advanced Rs. 1,49,99,350/- to various parties as an interest-free advance, therefore, it is not justified on the part of the AO to disallow the expenditure of interest claimed by the appellant. This issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of S.A.,Builders 288 ITR 1 (SC). Therefore, the addition made by the AO is deleted." 6. We have heard the Revenue and gone through the case file. A perusal of the lower appellate findings extracted hereinabove reveals....