AI Drafter 
TaxTMI 
TaxTMI 
2023 (5) TMI 353
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....was the Depreciable Asset of the Assessee. Even though Section 50(1) of the I. T. Act 1961 categorically states that these expenses incurred wholly and exclusively in connection with such transfer of such asset expenses will be deducted from Sale Proceeds arising even then, such expenses has been disallowed by the A.O. & confirmed by CIT(A). In light of the above said facts the disallowance of expenses amounting to Rs.1,36,140/- which is confirmed by the CIT(A) ought to be deleted. 2. The CIT(A) has also erred in confirming the disallowance of excess interest paid amounting to Rs.42,24,423/- to Elevators News Network Pvt. Ltd. The total interest which was paid to Elevators News Network Pvt. Ltd. was @18% amounting to Rs. 1,86,57,929/- & the rate of interest which was received from Mr. Anup Shyam Karnani being the Director of the Company to whom the same loan amount was advanced was @ 13.5%. This excess interest paid been @ 4.5% was disallowed u/s 36(1)(iii) of Income Tax act 1961. The loan amount which was advanced to Mr. Anup Shyam Karnani was on account of Commercial Expediency & not for Personal Purpose. As a prudent business, the Appellant ag....
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....t the assessee has incurred certain expenses on such sale. As per the provisions of section 50(2) the Assessing Officer has to consider only the net consideration for determining the capital profit or loss and not the gross consideration. In the given case Assessing Officer has proceeded to calculate the capital gain by considering the gross sale consideration, overlooking the related expenses incurred by the assessee. The expenses claimed by the assessee are part of such sale like commission and other dues to the society are connected with the transfer. Therefore, we direct the Assessing Officer to allow the claim of the assessee and consider to determine the capital gain or loss by considering the net sale consideration, accordingly, this grounds of appeal is allowed. 8. With regard to Ground No. 2, the relevant facts are, Assessing Officer observed that assessee has taken loan from M/s. Elevators News Network Pvt. Ltd. (in short "ENNPL") and paid interest @18% and he further, observed that assessee has given a huge loan to one of its Director Mr. Anup Shyam Karnani and charged the interest @13.5%. When the assessee was asked to substantiate on the above transactions, assessee....
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....y amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till date on which such asset was first put to use, shall not be allowed as deduction. Explanation Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause." 3) The sub section has three important words or phrases that are core to understanding of this Section I.e. Interest, (1) Borrowed and, (iii) For the purpose of Business or Profession. In the following paras we would elucidate the meaning of these with reference to this particular section (1) Meaning of "Interest" - The definition of interest in Section 2(28A) means "interest payable in any manner in respect of any moneys borrowed or debt incurred. But for Section 36(1)(ii), "interest is restricted to that on money borrowed and not on debt incurred. In ....
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....re the Supreme Court and the Honourable Supreme Court while giving judgement in the case of Madhav Prasad Jatia V. CIT, (SC) 118 ITR 200 has established that the expression occurring in Section 36(1)(iii) is wider in scope than the expression occurring in Section 57(ll). Thus, meaning thereby that the scope for allowing a deduction under Section 36(1)(iii) would be much wider than the one available under Section 57(iii). 4) This phrase, as held by many legal pronouncement is the most important yardstick for the allowability of deduction Under Section 36(1)(iii) of Income Tax Act, 1961. While explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs CIT(A), Chandigarh reported in 288 ITR 1 has used the word "commercial expediency By using this phrase Hon'ble Supreme Court has given a new dimension and clarified the concept further in the judgement the Supreme Court has defined commercial expediency as "an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a busi....
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....s 28 of the Act. 9) Further, it has been stated in this order that "In Madhav Prasad Jantia Vs C.I.T. U.P. AIR 1979 SC 1291, this court held that the expression "for the purpose of the 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 the court. 10) Further, it has been expressed in the same order that "In our opinion, the decisions relating to section 37 of the Act, will also be applicable to section 36(1)(ll) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for "commercial expediency" and it is immaterial if a third party also benefits thereby- 11) a) Further, the Honourable Supreme Court in the above mentioned case of S.A. Builders Ltd. has also relied on in the case of Atherton Vs British Insulated & Helsby Cables Ltd. (1925) 10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money....
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.... March 2012 in the books of appellant in the name of Elevator News Network Private Ltd. was Rs. 8,99,78,224/- This balance amount of Rs. 8,99,78,224/- included the interest amount of Rs. 9,28,224/- (Net of TDS). It wouldn't be out of place to submit that neither any interest nor any principal amount was repaid back to Lender, during the financial year ended 31st March 2012 b) Further during the financial year ended 31st March 2013 the interest amount which was provided was to the extent of Rs.1,43,57,181/- and the balance which was outstanding as on 31st March 2013 was Rs.10,39,39,147 (Net of TDS). No amount was repaid to the Lender during the financial year ended 31/3/2013 i.e. neither the interest nor the principal amount c) Further during the financial year ended 31st March 2014 the interest was provided by the Appellant to the Lender was to the extent of Rs.1,86,57,929/- and balance which was outstanding as on 31st March 2014 (Net of TDS) is Rs. 12,23,89,766, Further, even during the financial year ended 31st March 2014, the Appellant couldn't pay to the Lender neither the Interest nor the principal amount. 15) a) Further it wouldn't be ou....
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....ut of place to Inform you that in the financial year ended 31/3/2012 the Appellant did not have any other business income other than Money Lending Business. d) Appellant had offered for tax the profit which as per the Audited Financials for the financial year ended 31st March 2012 under the head "Income from Business and Profession" and the Income Tax Department also accepted the same without making any additions at the time of passing the Assessment Order u/s 143(3). e) Now this clearly indicates that the amount of interest which was paid in respect of capital borrowed was for the purpose of business or profession hence deduction was allowed u/s 36(1)(ii) of the Income Tax Act while computing the Business Income as per the provisions of section 28 of the Income Tax Act. f) Since the interest which is received from Mr. Anup Shyam Karnani was offered for tax under the head "Income From Business & Profession" this clearly indicates that the Loan given to Mr. Anup Shyam Karnani was for Business Purpose Only and not for any other reason. Though Mr Anup Shyam Karnani was a director of the company still the money was advanced to him for Business Purpose only an....
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....pellant wouldn't have incurred losses in the subsequent years due to drop in interest rate or also due to recovery of the principal amount. e) It wouldn't be out of place to inform you that till date Shri Anup Shyam Kamani hasn't paid neither the interest nor the principal amount to the outside parties from whom the loan was taken by him. Hence, the Appellant recovered the entire principal and interest amount so that the Appellant couldn't incur huge losses. Hence, the interest rate was reduced due to commercial expediency. In light of the above said facts and circumstances of the case no disallowance of interest should be made which is paid by the Appellant to the Lenders. 19) Though the entire facts of the case which is mentioned above in para 16, 17 & 18, was conveyed to the Assessing Officer still he disallowed the interest of Rs. 48,11,168/- for the reasons mentioned in para 5 & 6 of his Assessment Order passed u/s 143 (3) dated 5th December 2016. 20) a) On page 7 para 6 of the Assessing Officer has stated that in respect of interest received by the Appellant from Shri Anup Shyam Karmani, it is worthwhile to mention that section....
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....y as at the cost being incurred by the assessee company and the direct would be enjoying the benefits thereof b) The Assessing Officer has erred in mentioning that the Assessee Company has lent the amount to one of its director i Shri Anup Shyam Kamani with little interest which proves that the funds which were borrowed were diverted for non-business purpose. To this we would like to submit that when the interest which was received from the director i.e., @13.5% the same was recorded as a Operational Revenue in the Audited Financials, then, how can the Assessing Officer say that was diverted for Non- Business purpose when it was recorded as a Business Income c) Further the Assessing Officer submitted that the assessee company has lent the amount to the director i.e. Shri Anup Shyam Karnani with little interest i.e. @ 13.5% where as the assessee has paid interest to Elevator News Network Private Ltd. at much higher interest @ 18% To this we would like to submit that the Assessing Officer has ignored the facts that in the financial year ended 31st March 2012, the rate of interest which was obtained from the director 1.e. Shri Anup Shyam Kamani was ....
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....orrow money from Elevator News Network Pvt. Ltd. would be giving loan to its director and that too when pays a heavy interest to its lenders. Further, there is no justification as to why the director i.e., Anup Shyam Kamani, is a sole beneficial of receiving the loan and advances for little interest whereas such benefit could be passed on to others as well This strongly leads us to the conclusion that this has been done to reduce the tax liability of a profit making concern since Shri Anup Shyam Karnani is also a director of Elevator Network Company b) Now, the Assessing Officer has completely erred in submitting that there is no Justification as to why the director l.e. Mr. Anup Shyam Karnani is a sole beneficial of receiving the loan for little interest whereas such benefit could be passed on to others as well. To this, we would like to submit that the Appellant had the same situation in the preceding two financial years, but no objection was raised by the Assessing Officer while passing the Assessment Order u/s 143(3). Now, the reason why the Assessing Officer has changed his stand is only because of the fact that appellant had taken interest from Mr. Anup Shya....
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....n which the asset is brought to use is disallowed. The appellant contends that it has not bought any capital asset during the year so no disallowance under 36(1)(iii) should be allowed. The AO has dealt the issue para 5.14 of the order and I find no reason to differ from the view taken by the AO. In para 6 to 6.4 the Assessing Officer has elaborately discussed how the assessee failed to proved the direct nexus of use of borrowed funds for the purpose of business exclusively. The assessee failed to discharge its onus. The borrowed funds from Elevtor Network Company in which Shri Anup Shyam Karnani is also director were given for the benefit of the same person who happens to be a director the appellant. This is for the benefit of Shri Anup Shyam Karnani and does not fall into the purview of commercial expediency. Therefore I am of the opinion that the AO has rightly disallowed the excess interest payment. Ground No. 2 is therefore disallowed." 11. Aggrieved assessee is in appeal before us, at the time of hearing, Ld. AR submitted that assessee is in the business of money lending and in this regard he submitted copies of memorandum of association and highlighted the object clause o....