TaxTMI 
TaxTMI 
2023 (10) TMI 1032
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....he appellant reserves the rights to add, alter or modify any ground of appeal at the time of hearing." 2. Succinctly stated, the assessee, who is engaged in the business of trading of iron & steel as a proprietor of M/s. Chattisgarh Steel Traders, Raipur, had e-filed his return of income for A.Y.2010-11 on 29.08.2011, declaring an income of Rs. 1,12,97,780/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s. 143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O that the assessee, who had outstanding interest-bearing funds/loans of Rs. 10.51 crores as of 01.04.2009, had diverted funds of Rs. 21 lacs on 02.04.2009 in the garb of a gift that was given to his nephew, viz. Shri Brijesh Agrawal. The A.O. observed that the aforesaid amount of Rs. 21 lacs was, thereafter, received by the assessee as an unsecured loan from the aforesaid donee, viz. Shri Brijesh Agrawal (supra) at an interest of 18% P.A. The A.O. further observed that the aforesaid done, viz. Shri Brijesh Agrawal was also a lender/creditor with an outstanding balance of Rs. 26,71,016/- (Cr) on 01.04.2009 in the books of accounts of the assessee. Ref....
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....ter in appeal before the CIT(Appeals) but without success. Referring to the fact that the assessee had diverted the sum of Rs. 42 lacs as gifts to his nephews, viz. Shri Brijesh Agrawal and Shri. Kamal Agrawal and thereafter, received back the said respective amounts as interest-bearing unsecured loans @18% p.a; from both of them, the CIT(Appeals) was of the view that the entire series of transactions were illusory, colorable, ingenuine, and not for the purpose of business. Accordingly, the CIT(Appeals), upheld the disallowance of Rs. 7,56,000/- made by the A.O u/s. 36(1)(iii) of the Act, observing as under: "5. Decision: The records and the submission filed by the appellant have been perused. Brief facts of this case are that the appellant is the proprietor of M/s Chhattisgarh Steel Traders, engaged in the business of Iron & Steel Trading. The appellant filed his return of income for AY 2010-11, declaring total income at Rs. 1,12,97,780/-. The assessment has been completed u/s 143(3) vide order dated 28.03.2013 determining total income of Rs. 1,20,53,780/-. The AO has made disallowance of Rs 7,56,000/-u/s 36(1)(iii) of the Act on account of interest paid on unsecured loans tak....
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....ives are already paying highest tax on such interest income and the disallowance is uncalled for. 5.4 At this juncture, it is relevant to reproduce the section 36(1)(iii) of the Act: "Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- ...... iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:" From perusal of section 36(1)(iii) of the Act, it is evident that 3 conditions must be complied with namely, money must have been borrowed by the assessee, it must have been borrowed for the purpose of business and the assessee must have paid the interest on the aforesaid amount and claimed it as deduction. In the instant case, genuineness of the transaction claiming that it is for the purpose of business is in question. This phrase "for the purpose of business", as held by many legal pronouncements, is the most important yardstick for the allowability of deduction under Section 36(1)(iii) of Act. While explaining the meaning of this phrase the Hon'ble Supreme Court in the c....
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....to both the nephews of Rs. 21 lakhs each and then took loan of said amount on the same day from them paying interest @18%. In place of paying existing loan and reducing interest burden, appellant increased his interest burden thereby reducing taxable income. No businessman will gift money when he himself is in need of it. No prudent businessman will enhance his interest liability as done by the appellant in the instant case. The appellant has tried to give the whole arrangement a colour of business expediency though the real interest is to reduce tax liability. The appellant's contention that it preferred to have unsecured loans over the secured loans and the same was for the purpose of business is far from the truth. Therefore, this transaction cannot be held to have been entered into for purpose of business since there was no business expediency to enter into the said transaction. In fact it is an illusionary, colourable and non genuine transaction entered into with the main motive of reduction of tax liability. 5.7 The decision of Hon'ble Gujarat High Court in the case of Jayesh Raichand Shah V ACIT Tax appeal No. 705 of 202 July 2, 2013 [2015] 55 taxmann.com 108 (Guja....
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....y from all the aforesaid three persons on which the assessee chose to pay interest at 16 per cent. which aggregated to Rs. 7,46,965. None of the aforesaid persons could have got interest at 16 percent as the rate of interest given by the bank and financial institutions even on fixed deposit was not as high as 16 per cent in the year under appeal. The assessee claims that Shri Bhavik J. Shah alone was related to the assessee within the meaning of section 40A(2) (b) and remaining two persons were not related to the assessee within the meaning of section 40A(2). It is, however, not in dispute that all the three persons were related to the assessee which may or may not be covered by section 40A(2)(b). 18. Section 36(1)(iii) allows deduction for payment of interest on capital borrowed for the purpose of business. In the present case, the money was first diverted by the assessee from his business disguising it as gift to the aforesaid three persons and thereafter the same money was taken back by the assessee from the aforesaid two persons on which the impugned interest was claimed by the assessee to have paid to them. On the facts of the case, there is no borrowing of capital and, ther....
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....nterference of this court is called for(emphasis added). 5.8 In the present case also Rs 42 lakh was first diverted by the appellant from his business disguising it as gift to the two nephews and thereafter the same money was taken back from them as unsecured loan on which the impugned interest @18% was claimed by the appellant as deduction. On the facts of the Case, there is no borrowing of Capital and, therefore, the requirement of section 36(1)(ili) is not fulfilled. Without prejudice to the above observation, the entire series of transactions are illusory, colourable and not genuinely for the Purpose of the business. The appellant has deliberately adopted this artificial and colourable device for reducing the income and tax thereon. Therefore, considering the facts and circumstances of the Case and relying upon the judgement of Gujarat High Court in the case of Jayesh Raichand Shah V ACIT Tax appeal No. 705 of 202 July 2, 2013 (Supra) it is held that the assessing officer has rightly disallowed the interest of Rs. U/s 36(1)(iii) of the Act. I uphold the addition of Rs. 7,56,000/- made by the Assessing Officer. The grounds of appeal No.2 and 3 are dismissed. 6. Ground No. 1 ....
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....nce u/s. 36(1)(iii) of the Act of Rs. 7,56,000/- made by the A.O. was ill-founded, therefore, the same could not be sustained and was liable to be vacated. 11. Per contra, the Ld. Departmental Representative (for short, "DR") relied on the orders of the lower authorities. 12. We have given thoughtful consideration to the issue at hand and principally are in agreement with the Ld. AR that in case the assessee had sufficient selfowned/ interest-free funds available with him, then it has to be presumed that the amounts of gifts given to his relatives, viz. S/shri Brijesh Agrawal and Kamal Agrawal were made from the said funds. Our aforesaid view is fortified by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. 261 Taxman 165 (SC) wherein the Hon'ble Apex Court has held it that if the interest-free funds available to the assessee are sufficient to meet its investment, it could be presumed that the investments are made from the interest-free funds available with the assessee and not from borrowed funds. Also, a similar view had been taken by the Hon'ble High Court of Bombay in the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 34....
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....from. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs. 43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs. 313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs. 398.19 crores. In view thereof, it was submitted that from the analysis of the balance-sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and direc....
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.... Income-tax (Appeals) and the Income-tax Appellate Tribunal." (emphasis supplied) 5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected." 13. Also, the Hon'ble Suprem....