TaxTMI 
TaxTMI 
2018 (1) TMI 699
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....ee had filed his Return of the Income u/s 139(1) on 12-10-2010 for the Asst. Year 2010 - 2011, showing a Total Income of Rs. 1,30,49,975/- (One Crore Thirty Lacs Forty Nine Thousand Nine Hundred and Seventy Five only). The Assessing Officer disallowed a sum of Rs. 43,24,193/- (Rs. Forty Three Lac Twenty Four Thousand One Hundred Ninety Three Only) on account of Interest on the basis of following contention:- ~ That the assessee received interest on deposits at an average rate of 8.16% while paid interest on borrowed loan at an average rate of 13%. ~ That the interest income is not commensurate to the expense made. ~ That the expense made on borrowed fund used for purpose of investment is not a business expense. Further as per the Assessing Officer, the funds have been used in Investment in bank deposits as well as in Housing Cooperatives, shares in banks and purchase of mutual funds. Accordingly, the Assessing Officer was of the view that the expenditure is made with no business expediency. ~ In the opinion of the Assessing Officer more than 50% of the unsecured loan outstanding is taken from a related party, "Satya Prakash Sharma (HUF), which is covered u/ s 40A(2)(b) ....
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....ncome appears immaterial as the primary objective of the concern is to avail working capital finance from the bank to continue Assessee's business operations without any hindrances. iii) Further , Investment in Housing Society was made in the nature of Advance with a view of purchasing the Land from Shri Guru Dutta Co Operative Society for expansion of business. Hence the Investment was made for the long-term benefits for the business rather than earning any immediate return. 6. The Assessee also pointed out that the above Investments were substantially made out of assessee' own funds and or are incidental to the smooth functioning of the business and in accordance of commercial expediency of the business. It was argued that the Assessing Officer is bad in Law as well as in facts because:- i. The Investments are substantially made from Own funds. ii. Where ever borrowed fund is used for Investments, it is made for smooth functioning of the business and in accordance of" commercial expediency of the business. Reliance was also placed on the judgment of Hon'ble Supreme Court Of India in the case of S.A. Builders Limited v. Commissioner of In....
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.... 8. Without prejudice to above, the assessee submitted that for the purpose of computation of Average rate of interest, only Unsecured Loan can be considered. This is because Secured Loans consist of the sum borrowed from banks by me in the name of my proprietorship firm Special Steel Stores for specified business purposes and is not allowed to be diverted from business use. Hence the same should not be taken for the purpose of computing Average Rate of Return. Further, since the same can be used only for specified business purposes, these Secured Loans CANNOT be utilized for the purpose of granting Loan or advance or deposit to any third party or for the purpose of Investments due to rigid bank norms as the same can ONLY be used for working capital requirements, i.e. buying materials, paying off trade creditors, etc. Therefore, by no stretch of imagination, the rate of interest on Secured loan CANNOT be compared with the rate of interest on deposits. Further, Unsecured loans were borrowed at the rate of 9% to the extent of Rs. 8,10,00,000/- (Rs. Eight Crore and Ten Lacs only) and at the rate of 12% to the extent of Rs. 84,50,000/- (Rs. Eighty Four Lacs and Fifty Thousand Only) d....
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....ginary average rate of interest on borrowings and investments. CIT(A), in our view, rightly considered the action of the AO as not proper. We therefore confirm the order of CIT(A) and dismiss ground no.1 raised by the revenue. 11. Ground No.2 raised by the revenue reads as follows :- "2. On the facts and circumstances of the case and in law, the ld. CIT(A) erred n restricting disallowance to Rs. 15,500/- out of total disallowance of Rs. 2,34,525/- made u/s 14A rule 8D(2)(iii) of the I.T.Act, 1961." 12. The AO made a disallowance of expenses by invoking the provision of section 14A of the Act. In the computation of income, assessee had added back Rs. 9857/- as disallowance u/s 14A. The AO called upon the Assessee furnish the computation of the same. The assessee furnished the following :- Investment as on 01/04/2009 Rs.1981481/- Investment as on 31/03/2010 Rs.1961332/- Average Investment Rs.1971407/- 0.5% of Average Investment Rs. 9857/- The AO on perusal of the details was of the view that the assessee had taken only those investments which were in the personal balance sheet. However in the balance sheet of M/s Special Steel Stores also, fo....