IN THE INCOME TAX APPELLATE TRIBUNAL
"F" Bench, Mumbai
Before Shri D. Manmohan, Vice President
and Shri Rajendra, Accountant Member
ITA No. 2960/Mum/2012
(Assessment Year: 2007-08)
A C I T - 18(1) Shri Vasant R. Savla
1st Floor, Piramal Chambers Rawal Sea View, 1st Floor
Vs.
Lalbaug, Mumbai 400012 M.B. Raut Road, Shivaji Park
Dadar, Mumbai 400028
PAN - AMKPS7067B
Appellant Respondent
Appellant by: Shri Pradeep S. Arya
Respondent by: Shri Mayur R. Makadia
Date of Hearing: 05.09.2014
Date of Pronouncement: 19.09.2014
ORDER
Per D. Manmohan, V.P.
This appeal by the Revenue is directed against the order passed by the
CIT(A)-29, Mumbai and it pertains to AY 2007-08.
2. Disallowance of expenditure under section 57(iii) of the Income Tax
Act to the tune of `11,02,768/- is the subject matter of dispute before the
Tribunal.
3. Facts necessary for disposal of the appeal are stated in brief.
Assessee, an individual by status, is a Director in various companies and
earned salary income and dividend & interest income. In respect of previous
year relevant to AY 2007-08 assessee declared total income of `13,57,610/-
which includes income earned in the form of interest. During the course of
scrutiny proceedings the AO noticed that the assessee claimed `11,02,768/-
as interest expenditure against interest income of `17,92,134/- under the
head `Income from other sources'. Before analysing the facts of the case the
AO extracted provisions of section 57(iii), which reads as under: -
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"any other expenditure (not being in the nature of capital expenditure)
laid out or expended wholly and exclusively for the purpose of making
or earning such income."
In the opinion of the AO the language of the section imposes an obligation
upon the assessee to prove that such expenditure was incurred to earn
interest income. When called upon to explain, the assessee submitted that
he has a common fund wherein there are several receipts and payments in
the same bank account. The assessee has borrowed in the earlier years and
that interest bearing funds and interest free loans were mixed up and
utilised for making investments including interest free loans and now it is
not possible to segregate and identify the source of interest free advances
made. In his opinion it is impossible to trace each and every fund
movement. He has given a broad picture of availability of interest free funds
of `3.67 crores and interest bearing borrowals of `1.21 crores against which
interest bearing advances were of `1,58 crores and interest free advances
and other investments were to the tune of `3.30 crores. He pointed out that
interest free fund available with the assessee has to be assumed to be
utilised towards granting interest free advances and thereafter towards
interest bearing funds. In the present case the interest bearing advances by
the assessee were to the tune of `1.58 crores while the interest bearing
borrowings of the assessee is `1.21 crores and hence the entire interest
bearing advances have to be assumed to have been deployed for making
interest bearing advances.
4. The AO observed that the initial burden is upon the assessee to prove
that the said expenditure was incurred to earn interest income whereas the
assessee has not discharged the onus and hence the claim is not admissible
under section 57(iii) of the Act. The AO relied upon the judgement in the
case of Consolidated Fibres vs. CIT 146 Taxman 14 and also the decision of
the ITAT in the case of Mandideep Engineering & Packaging Industries (P)
Ltd. vs. CIT 77 ITD 307 to hold that netting of interest is not permissible
unless it is proved that the expenditure was incurred wholly and exclusively
for earning such income. He emphasised that under section 57(iii) of the Act
nexus should be established between loans taken and loans advanced so as
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to allow or disallow the interest expenditure. He accordingly disallowed the
claim of deduction of interest expenditure of `11,02,768/- referable to the
interest paid on the borrowal of `1.21 crores..
5. The learned CIT(A) in a very cryptic order allowed the appeal of the
assessee. It deserves to be emphasised that the facts were not elaborated
and the reasons given therein are not supported by referring to any facts.
The learned CIT(A) extracted the brief facts culled out from the written
submission filed by the assessee i.e., (a) the assessee borrowed `1.21 crores
and paid interest of `17.92 lakhs, and (b) on similar facts the ITAT has
allowed the assessee's appeal in the case of assessee's brother, Shri
Chimanlal R. Salve (ITA No. 1721/Mum/2008). In his findings the CIT(A)
observed that when the funds are inextricably mixed there is nothing wrong
to presume that borrowed funds are used to advance for lending and section
57(iii) allows relevant expenditure against earning of income from other
sources. He also observed that interest free advances and other investments
of the assessee are duly covered by the amount of capital and interest free
funds and no adverse inference, of diversion of funds, can be drawn.
6. Aggrieved, Revenue is in appeal before the Tribunal. The learned D.R.
adverted our attention to section 57(iii) of the Act to submit that the initial
onus is upon the assessee to prove that the expenditure was incurred wholly
and exclusively for the purpose of earning income under the head `Other
Sources'. In the instant case, except claiming that the funds were mixed, no
details were given as to what are the dates of availability of own funds and
interest bearing funds and the dates on which interest bearing funds or
interest free advances were given so as to appreciate fund availability on
each date. The learned CIT(A) has not verified the facts and hence the order
deserves to be set aside. He also submitted that even the assessee has not
filed the details as to what are the dates on which loans were taken and
when the loans were advanced. For example, on a particular date the
assessee may be having sufficient own funds out of which he might have
advanced some amount by charging interest but after one month he might
have borrowed some amount for the purpose of making some specific
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Shri Vasant R. Salva
investment which can easily be culled out from the date of taking the loan
and under what head the loan was taken, etc. Therefore the onus is upon
the assessee to prove the dates so that it can be appreciated as to on a
particular date interest bearing funds were utilised for advancing the
amount by charging interest. Here the assessee is Shri Vasant R. Salva
whereas the SB account No. 002767808 is in the joint name of Shri Vasant
Ramji Savla and Smt. Anjana Vasant Savla and therefore it cannot be said
that all the funds pertain to the assessee herein. In such an event the onus
is more upon the assessee to prove as to which loan was taken by the
assessee exclusively and which loan was taken in the joint names. If the
loan is taken in the individual name but it was deposited in the bank
account in the joint name it has to be assumed that it was meant for joint
utilisation unless it is shown that the joint account holder has no role to
play with regard to utilisation of bank account. He thus submitted that the
order passed by the CIT(A) deserves to be set aside.
7. On the other hand, the learned counsel for the assessee relied upon
the decision of the Hon'ble Bombay High Court in the case of CIT vs.
Reliance Utilities & Power Ltd. 313 ITR 340 to submit that when interest free
funds and interest bearing loans are mixed up, a presumption would arise
that investment would be out of interest free funds generated or available
with the company.
8. It may be noticed that the Hon'ble Court observed that interest free
funds should be treated as having been utilised first for any purpose. The
Bench therefore pointed out that if interest bearing funds are mixed with
interest free funds and supposed to be utilised in which event any amount
given by the assessee against interest bearing funds should first be treated
as having been advanced from out of interest free funds, even as per Hon'ble
Bombay High Court judgement, in which event, netting of interest is not
permissible. The learned counsel for the assessee was therefore called upon
to file detailed statement of source and utilisation of funds. The learned
counsel merely filed the joint bank account statement and statement of
sources and utilisation date-wise. On a perusal of the statement it is noticed
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that the assessee had balance of `34,604/- on 12.06.2006, which appears
to be interest free fund available and thereafter the assessee had taken some
loans and also received back certain interest free funds to the tune of
`3,00,000/- and `5,000/- till 23.06.2006. It can thus be seen that interest
free funds available as on 26.06.2006 was to the tune of `3,40,604/- and on
that date the assessee advanced a sum of `32,00,000/- to Savla Foods and
Cold Storage Pvt. Ltd. @12%. By applying the ratio of the judgement of the
Hon'ble Bombay High Court it has to be assumed that the advance was
given out of interest free funds that means `3,40,000/- of own funds were
utilised for advancing a sum of `32,00,000/-. Similarly, as on 08.09.2006
assessee has own funds of `5,91,200/- out of which `82,000/- loan was
given to Savla Foods and Cold Storage Pvt. Ltd. @12% and therefore it
cannot be said that interest bearing loans were utilised for this purpose. As
on 19.12.2006 the assessee had own funds of `25,84,423/- and by applying
the same logic one of the loans given on 19.12.2006 to the tune of
`25,00,000/- can be said to have been out of interest free funds and even in
respect of a second loan of `25,00,000/- `84,423/- is out of interest free
funds and only the balance can be said to have been utilised from interest
bearing funds. It could thus be seen that the assessee has advanced money
on various occasions from interest free funds and hence the entire interest
bearing funds might not have been utilised for advancing loans. Under these
circumstances the onus is upon the assessee to give date-wise statement of
availability of funds in his individual name (not from out of joint account)
and what is the availability on each date and how it was spent so as to make
an analysis; certainly if the funds are mixed up on a given date one has to
go by the presumption that first investment is out of interest free funds
generated, followed with interest bearing funds. On the same analogy if on a
particular date only interest bearing funds were there which were given to
any person without charging interest then interest paid on the interest
bearing funds cannot be allowed as deduction. Section 57(iii) imposes an
obligation upon the assessee to furnish details and the assessee cannot
merely take shelter under the decision of the Hon'ble Bombay High Court by
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Shri Vasant R. Salva
claiming that it is impossible to furnish details. When the details cannot be
furnished the AO will have no other alternative but to take an adverse
inference.
9. In our considered view the decision of the Hon'ble Bombay High Court
is applicable only when on a particular date interest free funds and interest
bearing funds are available. For example, on 15th of February assessee had
interest free funds of `5,00,000/- and interest bearing funds of `2,00,000/-
and the assessee has advanced a sum of `5,00,000/- to its sister concern
without charging interest out of the total availability of `7,00,000/-, the
natural presumption would be that interest free funds were first utilised for
advancing to the sister concern and therefore it cannot be assumed that
interest bearing funds were utilised for non-business purposes. However, let
us take another example wherein on the same stipulated date assessee had
interest free funds of `2,00,000/- and interest bearing funds of `5,00,000/-
and the assessee advanced a sum of `5,00,000/- to its sister concern
without charging interest. The presumption would be that `2,00,000/-
interest free funds available with the assessee were utilised for advancing to
the sister concern and the balance `3,00,00/- has been advanced from out
of the interest bearing funds and interest thereon has to be disallowed since
it was utilised for non-business purposes; merely because `5,00,000/- was
advanced for non-business purpose it cannot be assumed that `5,00,000/-
interest bearing funds were utilised for that purpose. Bearing in mind such
circumstances, the Hon'ble Bombay High Court propounded this theory that
when funds were mixed up it has to be assumed that interest free funds
available with the assessee would have been first utilised. Since the learned
CIT(A) has not appreciated the judgement of the Hon'ble Bombay High Court
in its proper perspective and the assessee has not furnished complete
details before the AO, in the interest of justice we set aside the matter to the
file of the AO who is directed to call upon the assessee to furnish detailed
bank account statement and date-wise utilisation of funds and if on a given
date funds are mixed, benefit of doubt should be given to the assessee in the
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light of the judgement of the Hon'ble Bombay High Court. In the light of our
detailed discussion the AO would reconsider the matter afresh.
10. In the result, the appeal filed by the Revenue is treated as allowed for
statistical purposes.
Order pronounced in the open court on 19th September, 2014.
Sd/- Sd/-
(Rajendra) (D. Manmohan)
Accountant Member Vice President
Mumbai, Dated: 19th September, 2014
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) 29, Mumbai
4. The CIT 18, Mumbai City
5. The DR, "F" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.
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