Referred Sections:
Section 36(1 )(iii) 01the Act.
Section 57(iii) of the Income Tax Act, 1961.
Section 28.
Referred Cases / Judgments:
CIT vs. Anand Technology Resource Park Pvt. Ltd., ITA Nos. 625 to 627 of 2006, order dated 30.8.2011.
case of S.A. Builders vs. CIT(A) Civil appeal No. 5811 of 2006 with 5812 of 2006,
Delhi High Court in ClT vs. Dalmia Cement (B.) Ltd. [2002J 254
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `SMC' NEW DELHI
BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER
I.T.A .No.-3083/Del/2018
(ASSESSMENT YEAR- 2014-15)
RAJ KUMAR SHARMA, vs ACIT, CIRCLE
157, DDA OFFICE COMPLEX, 61(1),
JHANDEWALAN EXTENSION, NEW DELHI .
NEW DELHI 110 055
PAN No. AQCPS90521
(APPELLANT) (RESPONDENT)
Appellant by Shri Ved Jain, Adv.
Mrs. Surbhi Goyal, CA
Respondent by Ms. Ekta Vishnoi, Sr. DR.
ORDER
This appeal by the assessee has been directed against the order
of Ld. CIT(Appeals)-20, New Delhi dated 31.03.2018 for the AY 2014-
15 on the following grounds of appeal:
1. On the facts and circumstances of the case, the
order passed by the Ld. CIT(A) is bad, both in the eye of
law and on the facts.
2 (i) On the facts and circumstances of the case, the
learned CIT(A) has erred both on facts and in law in
sustaining the disallowance to the extent of Rs.
14,48,731/- made by AO on account of expenditure
claimed by the assessee under section 36(1 )(iii) 01the
Act.
(ii) That the above said disallowance has been confirmed
despite the fact that the expenditure was incurred wholly
and exclusively for the purpose of business and
profession.
(iii) That the above said disallowance has been confirmed
rejecting the detailed explanation and evidences furnished
by the assessee.
3. On the facts and circumstances of the case, the learned
CIT(A) has erred both on facts and in law in holding that
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amount borrowed by the assessee was not utilized for the
purpose of business or profession.
4(i) Without Prejudice to the above, in the alternative, Ld.
CIT(A) has erred both on facts and in law in rejecting the
contention of the assessee that the expenditure incurred
by the assessee is otherwise eligible for deduction under
section 57(iii) of the lncome Tax Act.
5. The appellant craves leave to add, amend or alter any
of the grounds of appeal.
2. The brief facts of the case are that assessee filed his return of
income declaring income of Rs. 19,12,580/- on 22.7.2014. The case
of the assessee was selected for scrutiny for compulsory category for
complete scrutiny of the basis of reasons: "Large interest expenses
relatable to exempt income u/s. 14A"s. Notice u/s. 143(2) of the
Income Tax Act, 1961 (in short "Act") dated 23.9.2015. Notice u/s.
142(1) of the Act dated 4.11.2016 fixing the case for 10.11.2016 was
also issued to the assessee. In response to the notices, the AR of the
assessee attended the proceedings from time to time and filed
necessary details information etc. as required. Books of accounts and
vouchers were also produced during the course of assessment
proceedings which were examined. The Assessee is an Advocate by
profession and derive income from house property, income from
business and profession and income from other sources as in earlier
years. In this case the assessee has shown interest income of Rs.
6,38,869/- as income under the head other sources and has adjusted
the balance interest of Rs. 7,02,434/- against the interest paid on
loans. However, during the proceedings, the AO alleged that the
3
entire income received by way of interest has been set off towards
the bank charges and loan taken from the bank without considering
the fact that the assessee has shown the income of Rs. 6,38,869/- as
income under the head other sources. AO further observed that the
interest on loan and bank charges debited to P&L account do not have
a direct relationship with the profession of the assessee and cannot be
claimed as a business expenditure and also observed that since the
this amount of loan was invested in FDR and interest was received on
this investment, the assessee has not utilized the loan for which it
was availed. Assessee submitted that as these loans were obtained
for a business purpose, therefore the interest expenditure on these
loans is allowed u/s. 36(1)(iii) of the Act and also since the assessee
could not find a suitable premise, the assessee then proceeded to
invest these idle funds into FDRs, thereby earning interest income on
these investment. It was further submitted that the interest expenses
incurred on the borrowed funds and simultaneous earning of interest
income on the investment which exceeded the interest expenses, the
assessee claimed it as a business expenditure and the balance income
of Rs. 6,38,869/- under the head income was duly disclosed and paid
taxed thereon. However, AO disregarded the submissions of the
assessee and disallowed the expenses of Rs. 14,48,731/- on account
of interest expenses by alleging that these expenses do not have
direct nexus with the profession of the assessee and completed the
assessment at 33,61,310/- u/s. 143(3) of the Act vide order dated
4
28.12.2016. Against the assessment order, assessee appealed before
the Ld. CIT(A), who vide his impugned order dated 31.3.2018 has
dismissed the appeal of the assessee. Aggrieved with the impugned
order of the Ld. CIT(A), the assessee is in appeal before the Tribunal
challenging the addition made by the AO and sustained by the Ld.
CIT(A).
3. At the time of the hearing, Ld. Counsel for the assessee
submitted that disallowance in dispute has been confirmed despite the
fact that the expenditure was incurred wholly and exclusively for the
purpose of business and profession. It was further submitted that the
said disallowance has been confirmed rejecting the detailed
explanation and evidences furnished by the assessee and authorities
below have wrongly observed that the amount borrowed by the
assessee was not utilized for the purpose of business or profession. It
was further submitted that the lower authorities wrongly rejected the
contention of the assessee that the expenditure incurred by the
assessee is otherwise eligible for deduction under section 57(iii) of the
Income Tax Act, 1961. He further submitted that the loan obtained by
the assessee was to be used for the purpose of expanding the
business by purchasing a bigger office premises. The assessee also
submitted a declaration from the broker which clearly indicates that
the assessee was on a continuous lookout for a suitable office
premises. He further submitted that nowhere in the section 36(1)(iii)
5
of the Act it is specified that the loan obtained by the assessee has to
be invested on the date of borrowing. The section only specifies that
the purposes for which the funds are being used is business purposes
only, i.e., the amount has to be invested in the business only. It is on
the assessee's discretion when to invest the borrowed funds, provided
it is invested for the business purposes. To support his contention, he
relied upon the decision of the Hon'ble Karnataka High Court in the
case of CIT vs. Anand Technology Resource Park Pvt. Ltd., ITA Nos.
625 to 627 of 2006, order dated 30.8.2011. He also filed a paper
book containing pages 1-102 attaching therewith various
documentary evidences.
3.1 On the contrary, the Ld. DR placed reliance on the order passed
by the authorities below. She stated that since the amount of loan
was invested in FDR and interest was received on this investment, the
assesee has not utilized the loan for which it was availed. Hence, the
addition was rightly made by the AO and sustained by the Ld. CIT(A).
4. I have heard both the parties and perused the records
especially the orders of the authorities below, paper book; synopsis
and case law relied upon by the assessee's counsel. I find that in this
case the CIT(A) vide its order dated 31.03.2018 has upheld the action
of AO for disallowing interest expense of Rs. 14,48,731/- by alleging
that the interest on loan and bank charges have no direct nexus with
the profession of the assessee. I find considerable cogency in the
contention of the Ld. Counsel for the assessee that the loan obtained
6
by the assessee was to be used for the purpose of expanding the
business by purchasing a bigger office premise. The assessee also
submitted a declaration from the broker which clearly indicates that
the assessee was on a continuous lookout for a suitable office
premise. It is also noted that nowhere in the section 36(1)(iii) of the
Act it is specified that the loan obtained by the assessee has to be
invested on the date of borrowing. The section only specifies that the
purpose for which the funds are being used is business purpose only,
i.e., the amount has to be invested in the business only. It is on the
assessee's discretion when to invest the borrowed funds, provided it
is invested for the business purpose. This view is fortified by the
decision of the Hon'ble Karnataka High Court in the case of CIT vs.
Anand Technology Resource Park Pvt. Ltd., ITA Nos. 625 to 627 of
2006, order dated 30.08.2011, wherein it was held as under:
"14. A reading of the aforesaid provision makes it
clear the amount of interest paid in respect of
capital borrowed for the purpose of business or
profession is allowable as deduction in computing
the income under Section 28. In other words, the
assessee has to invest the money so borrowed in
business or profession. There is no indication in the
said provision that the amount is to be invested in
the business which he is carrying on, on the date of
borrowing. The amount is to be invested in his
business, business which he is carrying on or a
business which he intends commencing. But, the
test is, it should be a business. Therefore, the
contention of the revenue that unless the amount
borrowed is invested in the existing business, he is
not entitled to deduction under Section 36(1)(iii) is
not tenable. May be in a case where such borrowing
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is invested in acquiring shares, the intention of
acquiring shares is to be ascertained. If the
intention is to get only dividend it cannot be
construed as an investment in business or
profession. On the other hand if the investment in
shares is made with the intention of carrying on
business and the receipt of dividend is only
incidental or ancillary, then Section 36(1)(iii) is
attracted."
4.1. Since the assessee intended to purchase a business premise
from the funds borrowed, it can be very well concluded that the
purpose for which these loans were obtained were business purpose
only. It is noted that assessee could not find any suitable office, he
invested these idle funds into FDRs to reduce the burden of interest
cost to be borne on the borrowed funds and the funds are readily
available to the assessee as when a suitable office is found for
investment.
4.2 It is a well settled law that revenue cannot sit in the armchair of
a businessman to decide the reasonableness of a decision taken by a
businessman. Here, in this case also, the AO has alleged that the
borrowed funds were not for a business purpose while the assessee
has clearly established the nexus between the purpose of business
and the expenditure incurred. To support this view, I rely upon the
judgment of the Hon'ble Supreme Court of India in the case of S.A.
Builders vs. CIT(A) Civil appeal No. 5811 of 2006 with 5812 of 2006,
wherein it was held as under:-
"35. We agree with the view taken by the Delhi High
Court in ClT vs. Dalmia Cement (B.) Ltd. [2002J 254
8
ITR 377 that once it is established that there was
nexus between the expenditure and the purpose of
the business (which need not necessarily be the
business of the assessee itself), the Revenue cannot
justifiably claim to put itself in the arm-chair of the
businessman or in the position of the board of
directors and assume the role to decide how much
is reasonable expenditure having regard to the
circumstances of the case. No businessman can be
compelled to maximize its profit. The income tax
authorities must put themselves in the shoes of the
assessee and see how a prudent businessman would
act. The authorities must not look at the matter
from their own view point but that of a prudent
businessman. As already stated above, we have to
see the transfer of the borrowed funds to a sister
concern from the point of view of commercial
expediency and not from the point of view whether
the amount was advanced for earning profits."
4.3 After reading the aforesaid judicial pronouncement it is clear
that the AO has wrongly disallowed the expenditure claimed by the
assessee u/s 36(1)(iii) of the Act, by alleging that the interest
expenditure were not directly related to the business of the assessee.
Even otherwise, if the said expenditure is not allowable as a business
expenditure, then the interest expenditure is allowable as a deduction
u/s 57(iii) of the Act. During the year under consideration, the
assessee had earned interest on FDR amounting to Rs. 13,41,303/-
and a total expenditure on interest on loan and bank interest
amounting to Rs. 14,90,125/- As per the language of section 57(iii) of
the Act, the expenditure which is wholly and exclusively incurred for
the purpose of earning income chargeable under the head income
from other sources, is allowed as deduction from the said income of
9
the assessee. Thus, it can be concluded that there is a direct nexus
between the income earned and the expenditure incurred which
should allowable as a deduction u/s 57(iii) of the Act.
4.4 Keeping in view of the facts and circumstances of the case and
respectfully following the precedents as aforesaid, the addition made
by the AO and sustained by the Ld. CIT(A) is hereby deleted by
allowing the grounds raised by the assessee.
5. In the result, appeal of the assessee is allowed.
Order pronounced on 16-10-2019
Sd/-
(H.S. SIDHU)
JUDICIAL MEMBER
Dated: 16/10/2019
*SRB*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT, NEW DELHI
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