IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "D", MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND
SHRI VIJAY PAL RAO, JUDICIAL MEMBER
ITA No.5860/M/2012
Assessment Year: 2009-10
Shri Roshan Sethia, The ACIT, Wd. 18(2),
601, Madhukunj, 1st Floor,
Sayani Road, IT Office, Piramal Chambers,
Vs.
Prabhadevi, Lalbag,
Mumbai 25 Mumbai 400 012
Mumbai 400 021
PAN: AHBPS 1231K
(Appellant) (Respondent)
Present for:
Assessee by : Shri B.V. Jhaveri, A.R.
Revenue by : Shri Love Kumar, D.R.
Date of Hearing : 30.04.2015
Date of Pronouncement : 10.05.2015
ORDER
Per Vijay Pal Rao, Judicial Member:
This appeal by the assessee is directed against the order dated
27.07.2012 of the CIT(A) for the assessment year 2009-10. The assessee has
raised the following grounds in this appeal:
"1. The learned CIT (A) 29 (hereinafter referred to as the CIT (A)) erred in
law and on facts in confirming the assessment of the total income of the
Appellant at Rs.5835,060/- as against Rs.2249398/- returned by the
Appellant.
2. Order dt. 27/07/12 passed by Ld. CIT(A) as well as order dt.
31/10/11 passed by Ld. ACIT are bad in law as the same are not
based on facts and based on assumptions or surmises or erroneous
findings and has not considered submissions made by appellant.
3. The Ld. CIT (A) erred in law and on facts in confirming
disallowance of interest of Rs.3585618 u/s 57(iii) vide para 3.2 of his
order ( paragraph 6 of Assessment order).
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Shri Roshan Sethia
4. The Ld. CIT (A) erred in law and on facts in not adjudicating one of
the ground of appeal being ground no.4 which contested that
Without prejudice to above, alternatively interest paid is to be
allowed u/s 36 (1) (iii) or u/s 37.
5. The Ld. CIT (A) erred in law and on facts in not adjudicating one of
the ground of appeal being ground no.5 which contested action of
Ld. ACIT in assessing director remuneration as income from salary
instead of Income from Business or Profession as claimed by
Appellant.
6. The Ld. CIT (A) erred in law and on facts in not adjudicating one of
the ground of appeal being ground no.6 which contested as an
alternative ground, without prejudice to above, the Ld. ACIT has
erred in law and on facts in including interest income of minor
childs of Rs. 4123008.49 in stead of Rs. 1601095.49 (4123008.49
-2521913.00) in appellant income.
7. The Ld. CIT (A) erred in law in not considering any authorities cited
by him in support of his case.
8. The Ld. CIT (A) erred in law and on facts in confirming levy of
interest u/s 234 B and u/s 234C vide para 5 of his order."
2. At the time of hearing the Ld. A.R. of the assessee has stated that the
assessee does not press ground Nos.1, 2, 6 & 7 and the same may be
dismissed as not pressed. The Ld. D.R. has raised no objection if the ground
Nos.1, 2, 6 & 7 of the assessee's appeal are dismissed as pleaded.
Accordingly, the ground Nos.1, 2, 6 & 7 of the assessee's appeal are
dismissed being not pressed.
3. Ground Nos.3 to 5 are regarding the disallowance of interest
expenditure under section 57(iii) of the Act. The assessee has filed its return
of income declaring total income of Rs.22,49,398/-. During the assessment
proceedings the Assessing Officer (AO) has noted that the assessee disclosed
interest income of Rs.23,64,399/- under the head "Income from other
sources" whereas the assessee has debited the interest paid to various parties
amounting to Rs.43,88,240/- and clubbing interest income of Rs.41,23,008/-
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Shri Roshan Sethia
of three minor children. The AO disallowed interest expenditure to the extent
of Rs.35,88,438/- on the ground that the assessee has used the interest bearing
fund for giving interest free loan to Mrs. Tara Lodha as well as for making
investment in shares. The AO also observed that the loans were utilized for
acquiring controlling interest in M/s. Sim Diam P. Ltd. and therefore the
interest is not allowable in view of the judgment of Hon'ble Jurisdictional
High Court in the case of "CIT vs. Amritaben R. Shah" 238 ITR 777.
4. The assessee challenged the action of the AO before the Ld. CIT(A) but
could not succeed. The Ld. CIT(A) has held that the assessee has borrowed
fund and diverted it to investment in the shares and for the purpose of share
capital in a closely held company. The Ld. CIT(A) was of the view that
interest on money borrowed can be deducted as deduction under section
57(iii) only if the assessee earned interest from such borrowed fund.
5. Before us, the Ld. A.R. of the assessee has submitted that the assessee
has borrowed fund and invested the same by either giving loan or investment
in the shares of the group concern as well as shares of the other listed
companies from which it could earn interest income, dividend income and
capital gain on sale of such shares. The Ld. A.R. further pointed out that the
investment in the shares of M/s. Sim Diam P. Ltd. which is a closed company
of the assessee was in fact loan which was converted into the capital. The
assessee has invested the amount by giving loan to the said company on
which the assessee earned interest income in the earlier years. However, in
the year under consideration the said loan was already converted into the
share capital, therefore the interest which was earned in the earlier year could
not be earned during the year under consideration. The Ld. A.R. has
contended that earning income from the expenditure incurred is not a
4 ITA No.5860/M/2012
Shri Roshan Sethia
condition for allowing the deduction under section 57(iii) of the Act. It is
only for the purpose of making or earning of income which is required for
allowing the deduction under section 57(iii) and not the actual income earned
by the assessee. In support of his contention he has relied upon the judgment
of Hon'ble Supreme Court in the case of "CIT vs. Rajendra Prasad Moody"
(1978) 115 ITR 519 (SC) and submitted that the Hon'ble Supreme Court has
held that what section 57(iii) requires is that the expenditure must be laid out
or expended wholly and exclusively for the purpose of making or earning
income. It is the purpose of the expenditure which is relevant in determining
the applicability of section 57(iii) and that purpose must be making or earning
of income. Therefore, it is not the prerequisite condition under section 57(iii)
that this purpose must be fulfilled in order to qualify the expenditure for
deduction. The Ld. A.R. has contended that the interest expenditure incurred
by the assessee which is more than the income earned during the year does
not authorize the AO to disallow the expenditure in excess of income when
the purpose of the expenditure is to earn the interest income, dividend income
and capital gain out of the investment made by the assessee. The Ld. A.R.
has further pointed out that in the case of the assessee as per the balance sheet
as on 31.03.06 the borrowings to the extent of Rs.3,08,56,407/- were utilized
in the investment in the erstwhile partnership firm of Rs.3,18,24,635/- to earn
interest there from, remuneration and share in the profit. The business of
erstwhile firm was succeeded by M/s. Sim Diam P. Ltd. w.e.f. 01.04.06. As
per the balance sheet as on 31.03.07 borrowing to the extent of
Rs.6,33,64,665/- were utilized in giving loan to M/s. Sim Diam P. Ltd. to the
tune of Rs.3,58,01,120/- and investment in shares of M/s. Sim Diam P. Ltd. to
the extent of Rs.3,06,00,000/-. Thus the borrowed fund has been utilized in
giving loan as well as investment in shares of M/s. Sim Diam P. Ltd. The
purpose of taking loan was to earn the income from the investment either in
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Shri Roshan Sethia
the form of interest or in the form of dividend or capital gain and therefore the
interest expenditure is allowable deduction under section 57(iii) of the Act.
The Ld. A.R. has also relied upon the following decisions:
1. Delite Enterprises (P.) Ltd. vs. Income-tax Officer [(2008) 22
SOT 245 (Bom.)] dated February, 2008.
2. CIT vs. M/s. Delite Enterprises (P.) Ltd. ITXA No.110 of 2009
dated February, 2009 (Bom.)
3. M/s. Avshesh Mercantile (P.) Ltd. vs. DCIT (2012) 26
Taxmann.com 43 (Mum.)
4. CIT vs. Darashaw & Co. (P.) Ltd. (2014) 49 Taxmann.com
143(Bom.)
5. M/s. Topstar Mercantile Pvt. Ltd. vs. ACIT (2011) 334 ITR 374
(Bom.)
6. ACIT vs. M/s. Delite Enterprises (P.) Ltd. (2011) 135 TTJ 663
(Mum.)
7. CIT v. M. Ethurayan (2005) 273 ITR 95 (Mad.)
6. On the other hand, the Ld. D.R. has submitted that the AO has recorded
the fact that the assessee has taken loan from Shri Rohit Manhot which was
given as a loan to Mrs. Tara Lodha & Jain Investment and also used for
repayment of loan to Mrs. Purvi. As the assessee has no interest income from
Mrs. Tara Lodha & Jain Investment and repayment of loan to Mrs. Purvi
almost at the end of the year the interest payment to Shri Rohit Manhot is not
allowable under section 57(iii) of the Act as the expenditure was not incurred
for the purpose of earning the interest income. The assessee has also taken
loan from Smt. Sohnidevi Sethia which was utilized for giving loan to M/s.
Sim Diam P. Ltd. of Rs.28,00,000/- and to Karvy Infrastructure of
Rs.90,00,000/-. The assessee received back a sum of Rs.18,00,000/- from
M/s. Sim Diam P. Ltd. and gave it to Sanghavi Savla Stock Broker thus the
interest bearing amount was diverted for investment in shares. Similarly, the
loan taken from Sim Jewellery Pvt. Ltd. was utilized for giving laon to M/s.
Sim Diam P. Ltd. of Rs.3,00,000/- on 03.07.08. On 04.08.08 the assessee
6 ITA No.5860/M/2012
Shri Roshan Sethia
received Rs.1,50,000/- from M/s. Sim Diam P. Ltd. and paid to Jain
Investment on same date thus the interest bearing amount was diverted for
other investment. Further, the interest bearing amount was invested in the
shares of M/s. Sim Diam P. Ltd. to acquire controlling interest, therefore the
interest expenditure on said amount is not allowable under section 57(iii). He
has relied upon the orders of the authorities below.
7. We have heard the Ld. D.R. as well as the Ld. A.R. and considered the
relevant material on record. The AO has disallowed the interest expenditure
under section 57(iii) on the ground that the major part of the interest bearing
loan amount was used by the assessee in the investment of shares of M/s. Sim
Diam P. Ltd. as well as other listed and non listed companies, therefore the
interest expenditure as per the AO was not incurred for earning the income
assessable as income from other sources and consequently the interest
expenditure is not incurred by the assessee wholly and exclusively for earning
the income. The AO has given the details of the opening balances of loan,
addition, repayment as well as the outstanding balance as on 31.03.09 at page 3
& 4 of the assessment order in the peculiar form as under:
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8. Thus, the AO noted that the assessee has received fresh loan from four
parties namely Shri Rohit Manhot, Sim Jewellery Pvt. Ltd., Sohnidevi Sethia
and Aman Sethia during the year under consideration. The other amounts were
outstanding balances of the earlier years and shown as opening balance. There
is no dispute that there was no disallowance of interest expenditure under
section 57(iii) in the earlier as well as about the fact that earlier the assessee
has invested in the partnership firm, the business of which was succeeded by
M/s. Sim Diam P. Ltd. w.e.f. 01.04.2006. The borrowed amount to the extent
of Rs.3,58,01,120/- was utilized for giving loan to M/s. Sim Diam P. Ltd.
further to the extent of Rs.3,06,00,000/- was utilized for investment in the
shares of M/s. Sim Diam P. Ltd. As far as the other amounts of borrowed fund
the same were used for investment in the shares of the listed companies as well
as non listed companies. There is no dispute that as far as the loan amount to
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M/s. Sim Diam P. Ltd. the same has yielded interest income to the assessee.
Therefore to that extent there is no question of the investment made for not
earning any income. So far as the remaining investment is concerned, the AO
has disallowed the corresponding interest expenditure on the ground that the
assessee has not earned any income on the said investment. It is pertinent to
note that what is required for allowing the deduction under section 57(iii) is the
purpose of the expenditure incurred by the assessee and the said purpose is for
making or earning the income. Therefore, it is the potential income from the
expenditure incurred by the assessee and not the actual income earned by the
assessee from such expenditure. The Hon'ble Supreme Court in the case of
"CIT vs. Rajendra Prasad Moody" (supra) while considering the question of
allowability of the expenditure under section 57(iii) has observed as under:
"What s. 57(iii) requires is that the expenditure must be laid out or expended
wholly and exclusively for the purpose of making or earning income. It is the
purpose of the expenditure that is relevant in determining the applicability of s.
57(iii) and that purpose must be making or earning of income. s. 57(iii) does not
require that this purpose must be fulfilled in order to qualify the expenditure for
deduction. It does not say that the expenditure shall be deductible only if any
income is made or earned. There is in fact nothing in the language of s. 57(iii) to
suggest that the purpose for which the expenditure is made should fructify into any
benefit by way of return in the shape of income. The plain natural construction of
the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case
within the section, it is not necessary that any income should in fact have been
earned as a result of the expenditure. It may be pointed out that an identical view
was taken by this court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, 4 (SC),
where interpreting the corresponding provision in s. 12(2) of the Indian I.T. Act,
1922, which was ipsissima verba in the same terms as s. 57(iii). Bose J., speaking on
behalf of the court, observed :
" It is not necessary to show that the expenditure was a profitable one or
that in fact any profit was earned. "
It is indeed difficult to see how, after this observation of the court, there can be any
scope for controversy in regard to the interpretation of s. 57(iii).
It is also interesting to note that, according to the revenue, the expenditure would
disqualify for deduction only if no income results from such expenditure in a
particular assessment year, but if there is some income, howsoever small or
meagre, the expenditure would be eligible for deduction. This means that in a case
9 ITA No.5860/M/2012
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where the expenditure is Rs. 1,000, if there is income of even Re. 1, the expenditure
would be deductible and there would be resulting loss of Rs. 999 under the head "
Income from other sources ". But if there is no income, then, on the argument of
the revenue, the expenditure would have to be ignored as it would not be liable to
be deducted. This would indeed be a strange and highly anomalous result and it is
difficult to believe that the legislature could have ever intended to produce such
illogicality. Moreover, it must be remembered that when a profit and loss account
is cast in respect of any source of income, what is allowed by the statute as proper
expenditure would be debited as an outgoing and income would be credited as a
receipt and the resulting income or loss would be determined. It would make no
difference to this process whether the expenditure is X or Y or nil; whatever is the
proper expenditure allowed by the statute would be debited. Equally, it would
make no difference whether there is any income and if so, what, since whatever it
be, X or Y or nil, would be credited. And the ultimate income or loss would be
found. We fail to appreciate how expenditure which is otherwise a proper
expenditure can cease to be such merely because there is no receipt of income.
Whatever is a proper outgoing by way of expenditure must be debited irrespective
of whether there is receipt of income or not. That is the plain requirement of
proper accounting and the interpretation of s. 57(iii) cannot be different. The
deduction of the expenditure cannot, in the circumstances, be held to be
conditional upon the making or earning of the income."
9. There is a potential income in the shape of dividend on the investment
made by the assessee in the shares of M/s. Sim Diam P. Ltd. as well as other
listed and non listed companies. Accordingly, the potential income from the
investment is not ruled out though there was no real income during the year
under consideration. The test for allowing the expenditure under section
57(iii) is the purpose for making or earning income and not the actual
fulfillment of the purpose as held by the Hon'ble Supreme Court in the case of
"CIT vs. Rajendra Prasad Moody" (supra).
10. The issue before us is the allowability of the expenditure under section
57(iii) and therefore even if the potential dividend income may be an exempted
income which may attract the provisions of section 14A but in the absence of
any such disallowance by the AO the issue does not arise from the orders of
the authorities below for reconsideration. Therefore as far as the conditions for
allowability of the expenditure under section 57(iii) if the expenditure is laid
10 ITA No.5860/M/2012
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out for the purpose of earning the income then the conditions required under
section 57(iii) are fulfilled. Even otherwise the AO has discussed the
movement of the fund which shows that the assessee has invested the fund in
the shares which was treated by the AO as diversion of the interest bearing
fund. We failed to understand as to how the investments in shares can be
treated as diversion of fund when the income on such investment will be
assessed under the head "Income from other sources". Once the expenditure
laid out by the assessee for the investment which was capable of earning the
income the condition under section 57(iii) is fulfilled. By following the
judgment of Hon'ble Supreme Court in the case of "CIT vs. Rajendra Prasad
Moody" (supra) the Hon'ble Jurisdictional High Court in the case of "CIT vs.
Darashaw & Co. Pvt. Ltd." 226 Taxman 193 held in para 11 as under:
"11. In our view, after this authoritative pronouncement by the Hon'ble Supreme
Court, there is no scope for any other construction and particularly as suggested by
Mr. Gupta. We are of the opinion that this judgment of the Hon'ble Supreme Court
answers the issue of interpretation of Section 57(iii) squarely and in favour of the
assessee. More so, when no contrary judgment of the Hon'ble Supreme Court has
been brought to our notice, the argument that this judgment has been
misinterpreted and misread by the Tribunal does not commend to us. The Supreme
Court has held that the words in Section 57(iii) speak of purpose of the expenditure
and that is relevant. The argument of Mr. Gupta is that the purpose of the
expenditure and in the present case, has a relation with the income that is to be
eventually earned from the MSRDS bonds. That the bonds were disposed of means
the income by way of interest thereon would not accrue any longer. Therefore, the
deduction by way of interest on borrowings and which is stated to be a liability was
not a permissible deduction. That is the precise argument which has been dealt
with and the Hon'ble Supreme Court has clarified that the argument of the revenue
that the expenditure would disqualify for deduction only if no income results from
such expenditure in a particular assessment year, but if there is some income,
howsoever small or meagre, the expenditure would be eligible for deduction. The
Hon'ble Supreme Court gave an illustration in that regard and held that the when a
profit and loss account is cast in respect of any source of income, what is allowed
by the statute as proper expenditure would be debited as an outgoing and income
would be credited as a receipt and the resulting income or loss would be
determined. The Hon'ble Supreme Court held that how expenditure which is
otherwise a proper expenditure can cease to be a such merely because there is no
receipt of income, has not been explained by the revenue at all. It is in these
circumstances the Hon'ble Supreme Court held that Section 57(iii) does not require
11 ITA No.5860/M/2012
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that the purpose must be fulfilled so as to be expenditure qualified for deduction.
The language of the section does not admit of a construction that the expenditure
shall be debited only if any income is made or earned. The Hon'ble Supreme Court,
therefore, has concluded the issue and in our opinion, in favour of the revenue. In
doing that, the Hon'ble Supreme Court refers to the views of several High Courts
including this Court and upholds them."
11. In the case in hand, the authorities below have ignored the potential
income and the purpose of expenditure laid out for earning the potential
income on the investment but have given much emphasis on actual earning of
income and investment of M/s. Sim Diam P. Ltd. for controlling the state. A
similar view is taken by the Hon'ble Madras High Court in the case of "CIT
vs. M. Ethurajan" (273 ITR 95 (Mad) in para 9 to 11 as under:
"9. It is not in dispute that the respondent/assessee was a major shareholder of
Binny and Co. Ltd., which was referred to by the BIFR as a sick industry, and the
respondent/assessee borrowed moneys from Sundaram Finance and Diamond
Districts and invested the same in Binny and Co. Ltd., to rehabilitate the said
company under the BIFR scheme and to earn dividend therefrom, but however, the
respondent/assessee did not receive any dividend from the company. Hence, the
respondent/assessee claimed deduction of a sum of Rs. 60,00,000 as interest paid
on the said borrowals under section 57(iii) of the Act.
10. Where the assessee borrowed moneys for the purpose of making investment in
certain shares and paid interest thereon during the accounting period relevant to
the assessment year, but did not receive any dividend on the shares purchased with
those moneys, whether the interest on such moneys borrowed is admissible under
section 57(iii) of the Act in computing income from other sources came for the
consideration of the Full Bench of the apex court in CIT v. Rajendra Prasad Moody
[1978] 115 ITR 519, wherein the Full Bench held that the interest on moneys
borrowed for investment in shares which had not yielded any dividend was
admissible as a deduction under section 57(iii) of the Act.
11. The plain and natural construction of the language of section 57(iii) of the Act,
irresistibly leads to the conclusion that to bring a case within that section it is not
necessary that any income should in fact have been earned as a result of the
expenditure. What section 57(iii) of the Act requires is that the expenditure must
be laid out or expended wholly and exclusively for the purpose of making or
earning income. The section does not require that this purpose must be fulfilled in
order to qualify the expenditure for deduction : it does not say that the expenditure
shall be deductible only if any income is made or earned, vide CIT v. Rajendra
Prasad Moody [1978] 115 ITR 519 (SC)."
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12. In view of the above discussion as well as the following judgment of
Hon'ble Supreme Court in the case of "CIT vs. Rajendra Prasad Moody"
(supra), the judgment of Hon'ble Jurisdictional High Court in the case of "CIT
vs. Darashaw & Co. Pvt. Ltd." (supra) and judgment of Hon'ble Madras High
Court in the case of "CIT vs. M. Ethurayan" (supra), we find that the interest
expenditure on the borrowed amount used for the purpose of investment in the
shares is an allowable deduction under section 57(iii).
13. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 15.05.2015.
Sd/- Sd/-
(R.C. Sharma) (Vijay Pal Rao)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 15.05.2015.
* Kishore, Sr. P.S.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT (A) Concerned, Mumbai
The DR Concerned Bench
//True Copy// [
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.
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