TaxTMI 
TaxTMI 
2024 (3) TMI 1393
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....f Rs. 9,39,813/- on account of claim of depreciation which is bad in law and bad on facts. 4. The ld. CIT has erred in sustaining disallowance of Rs. 4,03,033/-, on account of interest on car loan and Rs. 1,13,550/- on account of payment of motor insurance expenses u/s 57 which is bad in law and bad on facts. 5. The appellant craves liberty to add, alter, amend or vary from the above the above grounds of appeal at or before the time of hearing." 3. Brief fact of the case is that the return of income for assessment year 2017-18 was e-filed by the assessee on 30.10.2017 vide acknowledgement No. 274712301301017 at an income of Rs. 1,11,46,350/-, Thereafter, assessee revised his return of income on 07.11.2017 vide acknowledgement No.293122911071117 declaring total income at Rs.1,11,46,350/-. The case was subsequently selected for Scrutiny through CASS and the reason of selection was "Large deduction claimed u/s 57". Accordingly, notice u/s 143(2) was issued on 13.08.2018 through Income Tax Business Application (ITBA) platform and duly served on the assessee's registered e-mail. Accordingly, notices u/s 142(1) were issued to the assessee on 06.08.2019, 25.10.201....
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....nterest expense was shown, were further advanced and interest income was earned. In this connection assessee claimed interest income of Rs. 67,89,633/- under the head Income From other sources and assessee has claimed interest expenditure of Rs. 62,11,788/-. As per section 57 of the Income tax act, 1961 expenditure incurred wholly and exclusively for the purpose of earning interest income shall be allowed as expenditure. In this regard assessee was asked to submit a nexus between interest bearing loans and interest earning advances. In his submission dated 15.11.2019 assessee submitted a list of loans taken and advance given along with date of loans taken and advance given. On perusal of the submission of the assessee it was noticed that the loans on which assessee is earning interest income during the year under consideration were advanced in the financial year 2004-05, 2005-06, 2006-07, 2008-09. 2011-12 2012-13, 2014-15, 2015-16 and 201617. Whereas, the loans on which interest expenditure claimed were borrowed in the financial year 2004-05, 2008-09, 2011-12, 2012-13, 2014-15, 2015-16 and 2016-17. As it was clear from the above that assessee has advanced higher amount of money in ....
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..... The assessee has claimed payment of interest on car loan of Rs. 4,30,033/- and payment of motor insurance expense Rs. 1,13,550/- as expense u/s 57 of the Act. The assessee was asked to substantiate his claim and establish the nexus with the income earned under the head income from other sources and interest paid on care loan. The claim of the assessee that the same car was used for purpose of the business was never established by the assessee. Assessee in its return of income claimed it as expense under the head income from other sources while in his submission dated 06.12.2019 assessee has claimed it as expense under section 36, section 32 and section 37 but he failed to submit nexus of such expense with income from other sources and also failed to establish allow ability of such expense under the head income from business or profession. Mere change of claim by the assessee during the assessment proceedings does not establish the allow ability of expense under the head Income from Business or Profession. Again, assessee himself has agreed that above mentioned expenses has no nexus with the income earned from other sources and hence cannot be allowed. 5. Aggrieved from the abo....
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....ose. Since the AO felt that the asset in question was claimed to be used for the benefit of the firms the appellant was a partner of and did not have any nexus with the appellant's interest income under Income from Other Sources, he sent a show cause notice asking the appellant to justify the allowability of the depreciation and the latter gave a combined reply dtd. 06/12/2019 which covers other expenses, viz., interest on car loan and motor car insurances to be dealt with, in Grounds 4 and 5 respectively hereinafter. The excerpt of the said reply reads as under- Disallowance of expenses of Rs. 14,83,396/- incurred for the purpose of earning interest income under the head income from other sources. That the assessee was asked as to why the aforesaid expenses should not be disallowed these expenses are not since these expenses has no bearing on interest income and expended wholly and exclusively for the purpose of earning or making such income. The details of expenses sought to be disallowed is as under: S. No. Particulars Amount 1. Interest paid on car loan 4,30,033/- 2. Motor Insurance 1,13,550/- 3. ....
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.... his Income from other Sources. I am, therefore, disinclined to oppose the action of the AO in making the disallowance of the above sum of Rs. 9,39,813 claimed u/s 57 of the I.T Act. The ground 3, therefore, stands dismissed. Grounds 4 and 5 Considering that expenses of interest paid on car loan (Rs 4,30,033) and insurance premia paid on the car (Rs.1,13,550) arose from one and the same asset (the motor car in question), the appellant's reply to the show cause notice dated. 27/11/2019 and his subsequent written submission were all common for claims of depreciation, interest paid on car loan and car insurance and of course, the discussions in the assessment order on all the three items were on similar lines, my decision in regard to the claim of depreciation as discussed against Ground 3 above, will hold good in respect of Grounds 4 and 5 too. Both Grounds 4 and 5, are, therefore, dismissed. Ground 6: Consequential in nature, so no separate discussion is called for. In the end, the appeal is dismissed." 6. As the assessee did not receive any favour from the appeal filed before ld. NFAC/ CIT(A). The presen....
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....appellant in making his investment in the various firms and giving loans and advances. The ld. AO had made a fatal error in considering only the new loans and interest relatable only to these borrowings were allowed. The old borrowings on which interest was being paid was not considered. Further in these accounts there are regular transactions in which the funds are rotating depending upon the requirements and the year end balances being considered may not sometimes reflect the correct position. The theory of averages cannot be applied when exact date of all the years and calculations of interest is available on each loan account. 1.7. All the loans taken are verifiable and which had not been doubted or disputed in any of the assessment proceedings. The payment of interest payment is also not in dispute, all the parties are regular income tax assessee. Further the earning of income is also from various firms and other parties is also well accepted. The benefit is flowing not only in the form of interest but other benefits also in the form of remuneration and share of profits which the ld. AO has completely failed to appreciate. The total remuneration received from the firm....
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....s. 5 Lakhs." The disallowance out of interest was deleted. ii. S.A. BUILDERS LTD.,vs. CIT (2007) 288 IR 1 (SC) In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g. a subsidiary of the assessee) should be allowed as a deduction under section 36(1(iii) of the Income Tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression "commercial expediency" is one of wide import and includes such expenditure as a prudent business-man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of the business". "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. iii. Shahibag Entrepreneurs v. Income-tax Officer 50 ITD 1....
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.... facts and circumstances of the case could the Assessing Officer disallow proportionate interest, because it had paid substantial interest on loans obtained by it without correspondingly taking/charging interest on the receivables. Under the provisions of the Act, a person can be subjected to tax in respect of real income, i.e., to say income which has either been received by him or which has arisen or accrued to him. There is no provision anywhere in the Income-tax Act to subject a person to tax in respect of hypothetical income, that is to say, an income which ought to have been earned or which the assessee had jailed to earn. Thus, the first appellate authority had erred in confirming the disallowance/ addition of proportionate interest of varying amounts for each of the years under appeal. The findings and conclusions of the assessing authority were, therefore, reversed and the additions made by him in each of the three relevant years were deleted. iv. Raj Kumar Singh & Co. v. DCIT 51 ITD 628 (All.) Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1990-91 - Assessee-firm was a sub-contractor and also earn....
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....e entirely from borrowed funds, no disallowace was called for-Held, yes Held When the Commissioner (Appeals) went on to sustain the addition partly, he clearly proceeded on the footing that the assessee's own capital funds were available for making the interest-free advance. Having taken such a line, he should have proceeded further to examine the matter to see whether the initial interest-free advance of Rs 2 lakhs itself had come out of the assessee's own funds. The idea of weighted average was all right in theory but theory could not take the place of facts. The fact of the matter was that the Assessing Officer had not given any finding on the question whether the sum of Rs. 2 lakhs came entirely from the borrowed funds of the assessee. In the circumstances, no disallowance was called of in the instant case. vi. Gujarat Narmada Valley Fertilizers v. DC.I.T 108 taxman 213 (Ahd.) (Mag.) Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on capital borrowed - Assessment year 1995-96 - Whether, where no direct nexus had been proved between interest bearing loans taken by assessee and interest free advances given to associate concern....
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.... interest was charged from them - Whether where Assessing Officer had not been able to establish nexus between interest bearing loans taken and interest-free advances made by assessee to its directors, Commissioner (Appeals) was justified in allowing interest and deleting additions - Held, yes Held The revenue was not able to controvert the factual findings given by the Commissioner (Appeals) that the department failed to establish nexus between the interest bearing loans taken by the assessee and the interest-free advances made to its directors. Therefore, the Assessing Officer was not justified in making disallowance of Rs. 57,885 on account of interest payable by the assessee and adding the same back to the income of the assessee. So, the Commissioner (Appeals) had rightly deleted the impugned addition. The assessee's claim of interest on borrowed capital was allowed. ix. CIT v. Hotel Savera 148 CTR (Mad) 585 Business expenditure - Interest on borrowed capital - Advance to third party without charging interest - Even after debiting the drawings and the loss, there are sufficient funds with assessee-firm to cover the entire advance - Firm payin....
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....funds by way of interest-fee loans to sister-concern does not allow disallowance of interst paid - A Ltd. and AB appearing on two sides of the assessee's balance sheet are one and the same concern and when both these amounts are netted out there would be a net credit balance - No loan was advanced to said concern and the accountant had wrongly depicted the same amount on both sides - As regards advances made to other concern AS, the sole fact that cheques were issued from the cash credit account of the assessee does not prove that there is a nexus - Total borrowal of the assessee is covered by its business assets in the form of sundry debtors and stock on hand - Therefore, AO was not justified in disallowing part of the interest paid by assessee on its overdraft account. Conclusion : No part of interest paid by assessee on its overdraft account could be disallowed on the ground that assessee had made interest-free advances to its sister concern by issuing cheques from its cash credit account when it has sufficient interest-free funds available to match the interest-free advances. xii. Smt. Tara Devi v. ITO 68 TTJ (Jd) 361 Business expenditure - Interest o....
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...., as far as the I-T Act is concerned, it is an entity distinct and separate from its partners. So, while the remuneration and interest earned by partners from the firm is taxable in the hands of the partners, the same is allowed as an expense for the firm from its profits. Once the firm pays taxes on its profits, any share distributed thereon, to avoid double taxation of the same income the same is excluded from the income of the partner. But the fact remains that such income also suffers incidence of tax. 2.6. Your kind attention is invited towards the decision in the case of Matubai Chunilal Patel v. CIT reported in 66 ITR 408 (Guj) "10. It is from that point of view that we have to approach the question that has been referred to us in the instant case. Under clause 7 of the deed of partnership, the assessee was one of the two managing partners of the firm of M/s. Dhirajlal Khushaldas & Bros. That partnership firm was the managing agency firm of limited company and was managing the affairs of that company. The amount which has been claimed by the assessee is found to have been incurred by the assessee in connection with the business of the firm and it is further....
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....ges for disbursement of amounts to Zamindars who were given advances to make sure that tey sell their produce through the assessee. As such the amount was admissible and should have been allowed. The Supreme Court in the case of Ramniklal Kothari has laid down a general proposition that the business carried on by a firm is business carried on by the partners. Profits of the firm are profits earned by all the partners in carrying on the business. The share of the partner is business income in his hands for purposes of s. 10(1) of the IT Act, 1922, and being business income expenditure necessary for purposes of earning that income and appropriate allowances are deductible therefrom in determining taxable income of the partners.Taking into consideration the general proposition of law laid down by the Supreme Court, Gujarat High Court and the Patna High Court that the partner if he expends an amount in earning the share of profit from a firm, he can on showing its actual expenditure be allowed a deduction from the total income, the case of the assessee is to be examined. The authorities below have not bifurcated the amount of Rs. 12,000 as to the expenditure on petrol and the depreciat....
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.... decision of Hon'ble ITAT is attached, and in view of the said decision also the claim of the deduction may kindly be allowed to the appellant. 2.10. It is therefore submitted that the claim of expenses against business income may kindly be allowed to the assessee. It is also submitted that the claim of depreciation had been allowed in the earlier years also, and there would be no justification to disallow the same in the current year. " 7. The ld. AR of the assessee in addition vehemently argued that the ld. AO and ld. CIT(A) did not demonstrate the use of fund for other purpose the interest income is higher than the interest claim and the ld. AO has already accepted the fact that the assessee has invested the amount in firm and has also given the advances on interest. The ld. AO on the one hand accept that the use of the car is for the purpose of business and on the other hand disallowed the related claim of the expenditure which is contradictory. He relied the following observations of the AO Further in his own reply vide para 4 assessee accepted that this asset was used specifically for business purpose but also failed to substantiate his claim regard....
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....hare of profits from these firms. The assessee is partner in M/s Kanhiyalal Rakesh Kumar & Co, M/s Balaji Enterprises, M/s Jagdamba Exports, and M/s Jagdamba Enterprises. The remuneration received from the various firms in which the assessee is a partner was shown as business income, while the interest income received form these firms was disclosed as income from other sources including various other interest income earned by the assessee. The interest paid was also claimed as deduction against the interest income shown by the assessee which has been partly allowed by the ld. A.O. The perusal of the assessment order would reveal that that the assessee had received interest income of Rs. 67,89,633/- against which the interest paid was Rs. 62,11,788/-. The interest received from firm was also included in the interest received. The ld. AO observed that the interest from firm is taxable as business income and therefore the same needs to be taken as business income. It is submitted that whether the same is considered as business income or income from other sources, the deduction of interest was allowable against such interest income and other income received from the firm. Besides inter....
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....annot direct the assessee to prove each rotating fund to prove with having direct nexus when interest earned is higher then the interest paid and there is no allegation of diversion of fund, thus, the interest expenditure cannot be denied to the assessee. We also find from the record that the assessee has in total offered the interest income of Rs. 66,83,393/- and claimed the interest payment of Rs. 62,11,788/- which is not exceeding the interest received and therefore, even in the assessment order, we find that the interest payment is not disputed by the ld. AO and he has also accepted that assessee has given the loan and advanced as made the investments form various parties. Considering that the aspect of the matter the claim of Rs. 52,51,681/- cannot be denied to the assessee and in terms of these observations, the ground No. 2 raised by the assessee is allowed. 10. As regards the Ground No. 3, the ld. AO noted that the assessee has used the car and claimed the relevant expenditure against the other sources on the genuine use of the motor car and payment of insurance and car loan interest which is put to use by the assessee for the business purposes wherein the assessee has a....