TaxTMI 
TaxTMI 
2005 (2) TMI 442
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....ing the previous years relevant to the three assessment years under appeal, the aforesaid project was in the stage of construction and setting up and the business of the company was not commenced. The assessee-company had raised funds to be utilized in the construction of the said project from various financial institutions and was paying substantial interest on such funds. The aforesaid funds were partly utilized for the project construction work and the surplus funds were invested by the assessee in term deposits with a view to earn interest. During the course of assessment proceedings, it was claimed that whatever interest income was earned by the assessee is deductible from the cost of the project. In the original assessment made by the Assessing Officer, this argument was rejected having regard to the Supreme Court judgment in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The Assessing Officer was of the view that the gross interest receipts had to be brought to the charge of tax as income from other sources. Accordingly, the assessments were completed. The assessee appealed unsuccessfully to the CIT(A). 3. The assessee-company filed a....
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....y of furnishing proof or evidence in this behalf. After hearing the assessee, the Assessing Officer may decide the assessee's claim in accordance with law. With these directions, we restore the matter to the file of Assessing Officer and allow the ground for statistical purposes." From the above, it is seen that the Tribunal approved in principle the proposition that if any expenditure including interest paid on borrowed funds is allowable under section 57(iii) against the gross interest income, the same has to be allowed. For quantification of such expenditure, the issue was restored to the Assessing Officer for all the three years. 4. The Assessing Officer has considered in detail the legal aspects of the issue and has ultimately recorded a finding that the Supreme Court decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., was squarely applicable and no expenditure is allowable under section 57(iii) for the simple reason that such expenditure cannot be said to be laid out or expended wholly and exclusively for the purposes of making or earning such income. The Assessing Officer was of the view that the funds were raised by the assessee with the purpose....
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....ed on the Supreme Court decision in the case of Continental Construction Ltd. v. CIT [1992] 195 ITR 81. He invited our attention to the relevant ratio of this case, which is reproduced below from the headnote: "Contracts of the type envisaged by section 80-O are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contract. For purposes of income-tax, the principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the contexts: (a) of the capital and revenue constituents comprised in them; (b) portions of expenditure attributable to business and non-business purposes; (c) of places of accrual or arisal; and (d) of agricultural and non-agricultural elements in such receipts or payments." It is submitted by the ld. counsel that in the assessee's case also the question is how much expenditure is required to be capitalized as cost of project and how much expenditure is deductible under secti....
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....o borrow and buy raw material but in the assessment years the company finds it unnecessary to buy raw material and spends it on capital assets. Will the ITO decide the case with reference to what happened in the accounting year or what happened in the assessment year? In our opinion, it was rightly held by the Nagpur Judicial Commissioner in Nagpur Electric Light & Power Co. v. CIT that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure." The ld. Counsel also led us through the statement of allocation of cost of borrowing and administrative expenses which are compiled in the Paper Book. 6. The ld. DR, Shri Mahesh Kumar strongly supported the orders of the Revenue authorities and emphasized the phraseology of section 57(iii), which may be reproduced below: "57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely:- (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the pu....
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....le transfers. The courts and authorities are not to wear blinkers to overlook or condone the passing off of public revenue to one's own kith and kin by subterfuge or clandestine or clever devices clothed in legalistic jargon. Instead it is their duty to lift the veil of apparent legality and get to the truth or substance of a transaction to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there are abnormalities attaching to such transactions. It is not for the Court to go into appreciation of evidence of circumstances attaching to a transaction to determine whether the Tribunal was justified in arriving at the finding that a certain payment was not exclusively for the purpose of the business of the assessee as this is wholly a question of fact and not of law." The ld. DR further relied on the Bombay High Court decision in the case of CIT v. Globe Theatres (P.) Ltd. [1980] 122 ITR 240 and invited our attention to the relevant part of the ratio of this case, which is reproduced from the headnote: ....
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....rt headnote of this case, which is as under: "Section 57 of the Income-tax Act, 1961 - Income from other sources - Deductions - Assessment year 1991-92 - Assessee, borrowed funds for its business purposes but same were not used for its business purpose but were invested somewhere else on which interest was earned by assessee and interest income was treated as income from other sources - Whether deduction claimed under section 36 can be allowed to be deducted from income from other sources while computing income under section 56 - Held, no - Whether interest paid could be termed as expenditure incurred wholly and exclusively for earning income from other sources - Held, no - Whether assessee would be entitled for netting between interest income and interest paid on borrowed funds - Held, no." The ld. DR also submitted that the judgments which have been relied upon by the ld. counsel for the assessee were rendered in different contexts and therefore the ratio of these cases cannot be directly applied to the case of the assessee. 7. We have given a careful consideration to the elaborate arguments submitted on behalf of the assessee appellant as also on behalf of the Dep....
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....ourt that when the receipts and expenses are consolidated, such receipts and expenses have always been considered apportionable between the following categories: (a) Capital and Revenue constituents comprised in the consolidated receipts and expenses. (b) Portion of expenses for business and non-business expenditure. (c) Agricultural and non-agricultural elements in such receipts and payments. The Hon'ble Gujarat High Court, in the case of H.K. (Investment) Co. (P.) Ltd., categorically held that the common expenses have to be apportioned as allowable separately under sections 36(1)(iii) and 57(iii). The Supreme Court, in the case of India Cement Ltd. observed that what is important is the actual use of the loan and not the intention or motive at the time of raising the loan. In other words, if a loan is raised for one purpose, but the same is utilized for some other purposes, while considering the deductibility of interest on such loan, the actual user must be considered rather than the motive or intention at the time of raising the loan. The mandate of this decision is very clear. 8. The ld. DR has laid great emphasis on the phraseology of sect....
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.... of section 57(iii). However, we find that the cases which have been cited before us on behalf of the assessee appellant were not considered by the Indore Bench. The principle of apportionment has been accepted by the Supreme Court in the case of Continental Construction Ltd. and by the Gujarat High Court in the case of H.K. Investment Co. Pvt. Ltd. The ld. DR has relied on the Supreme Court in the case of Smt. Padmavathi Jaikrishna. In this case, the assessee derived income from other sources in the shape of interest, dividend etc. Out of the interest of Rs. 26,986/- paid by the assessee on monies borrowed, the ITO disallowed a sum of Rs. 10,239/- on proportionate basis on the ground that to that extent the loan was used to discharge the assessee's liability for payment of income-tax, wealth-tax and annuity deposits. In these circumstances, it was held by the Supreme Court that the Department was justified in disallowing the interest on the loan, which was not incurred for the purpose of making investment yielding interest and dividend income. Similarly, in the case of Ms. Ila R. Ambani, the ITAT, Mumbai Bench observed that the interest paid on loan used for acquiring jeweller....
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....p; Amount (Rs.) Pre-operative income (details as per separate statement) 1,29,76,992/- Weighted Investment Funds (annualized) (Funds Invested X Period/365) (I) 8,03,10,239/- Average annualized yield 16.16% Carrying cost of rupee funds raised (details as per separate statement) (A) 2,68,93,204/- Weighted Funds Raised (annualized) (Total Funds used X Period utilized/365) (B) 21,97,66,255/- Cost of Funds raised (C)=A/B 12.24% Cost of Funds invested I+C 98,27,713 Administrative Costs (X) (As per company accounts for the year) (to the extent related to corporate finance activities) Salaries and wages (20%) 28,69,456/- 5,73,891/- Printing and stationery (25%) 1,53,876/- 38,469/- Postage and telephone (25%) 5,05,055/- 1,26,264/- Corporate publicity charges (20%) 2,24,180/- 44,836/- Conveyance, vehicle and local travelling (20%) 16,47,434/- 3,29,487/- Professional expenses (25%) 3,35,621/- 83,905/- Sundry expenses (10%) 14,02,103/- 1,40,210/- 13,37,062/- Asse....