Shri Kailash Chand Soni Vs ACIT (ITAT Jaipur)
The issue under consideration is whether the addition on account of disallowance of interest expenses which are in accordance the provisions of section 57(iii) of the Income Tax Act, 1961 is justified in law?
In the present case, the assessee has taken unsecured loans from various parties during the year under consideration or in the earlier years for the purpose of advancing loans to other parties and making investment in finesse jewels Pvt. Ltd. where the assessee is director and shareholder. During the year under consideration the assessee has received total interest of Rs. 4,21,667/- from loan advanced to various parties and has shown total investment in finesse jewels of Rs. 52,29,785/- as on 31.03.2014. These funds have been raised through unsecured loans taken from various parties on which the assessee has to pay interest of Rs. 12,01,145/- during the year under consideration. Therefore it is clear that all the funds have been utilized for earning interest income or for business purpose and for no other use. AO made disallowance of deduction claimed under section 57(iii) in respect of interest expenditure on the ground that assessee has advanced money to his sister concern M/s. Finesse Jeweles (P) Ltd. at nil rate of interest out of commercial expediency.
ITAT states that the assessee has provided AO with the bank statements in which it is clearly visible that the funds raised from the unsecured loan taken from various parties is utilized for lending money to various parties. It means that the interest paid on unsecured loans is expended wholly and exclusively for earning the interest income from loans and advances. In addition to that the assessee has advanced money to its sister concern M/s finesse jewles Pvt. Ltd. at nil rate of interest for the purpose of earning the income from the investment either in the form of interest or in the form of dividend or capital gain which will be assessed under the head “Income from other sources” in the year when it is earned. It is immaterial whether the assessee has made profit out of such expenditure or not. For claiming deduction u/s 57(iii) of the income tax act it would be sufficient to prove that there is nexus between the income earned and amount expended. Therefore here in the case of the assessee as all the requirements for claiming deduction u/s 57(iii) of the income tax act, 1961 are fulfilled, assessee can avail the full deduction u/s 57(iii).
Hence, appeal file by assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee against the order of ld. CIT(A)-2, Jaipur dated 28.06.2019 wherein the assessee has taken the following grounds of appeal:-
“1. Under the facts and circumstances of the case the learned CIT(A) has erred in confirming the addition of Rs. 7,79,478/- on account of disallowance of interest expenses which are in accordance the provisions of section 57(iii) of the Income Tax Act, 1961.
2. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing.”
2. Briefly stated, the facts of the case are that the assessee is an individual and derives income income from salary and commission from M/s Finesse Jewels Pvt. Ltd. in addition to this. The assessee also earned capital gain income and interest income during the year under consideration. The assessee filed its return of income declaring total income of Rs. 17,04,990/-on 27.12.2014. Subsequently, the case was selected through cash for limited scrutiny u/s 143(3) of the Act and after serving statutory notices and seeking reply of the assessee. The additions/ disallowance u/s 57(iii) of the Act was made in respect of interest expenditure amounting to Rs. 7,79,478/-.
3. Aggrieved the order of AO, the assessee preferred an appeal before the ld. CIT(A) and ld. CIT(A) considering the case of both the parties dismissed the appeal of the assessee.
4. Aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us on the ground mentioned hereinabove.
5. Regarding Ground No. 1, this ground raised by the assessee relates to challenging the order of ld. CIT(A) in confirming the additions of Rs. 7,79,478/- on account of disallowance of interest expenses u/s 57(iii) of the Act.
6. The ld. AR appearing on behalf of the assessee reiterated the same arguments as raised by him. The ld. AR also relied up on the written submissions submitted by him before ld. CIT(A) as well as before us.
7. The written submissions submitted by the assessee before the ld. CIT(A) are in Para 2.2 of its order and the same is reproduced below.
“2.2 The relevant extract of the submission of the appellant is an under:-
“The assessee has taken unsecured loans from various parties during the year under consideration or in the earlier years for the purpose of advancing loans to other parties and making investment in finesse jewels Pvt. Ltd. where the assessee is director and shareholder. During the year under consideration the assessee has received total interest of Rs. 4,21,667/- from loan advanced to various parties and has shown total investment in finesse jewels of Rs. 52,29,785/- as on 31.03.2014. These funds have been raised through unsecured loans taken from various parties on which the assessee has to pay interest of Rs. 12,01,145/- during the year under consideration. Therefore it is clear that all the funds have been utilized for earning interest income or for business purpose and for no other use. The income tax return of the assessee along with the balance sheet and capital account is available herewith on paper book page no. 1 to 6 for your verification. The genuineness of the claim of the assessee is proved herewith in the following points as under:-
1. Interest is received on loan and advances at the rate not lower than rates on which unsecured loan is given:-
The Learned A.O. has stated in its order dated 20:12.2016 that the “the assessee’s claim of interest expenditure of Rs 12,01,145/- u/s 57(iii) is not justifiable since expenditure is not related to exclusively and wholly for earning income of Rs. 4,21,667/- because logically no common prudent man intentionally incur loss by obtaining loans at higher rate of interest and advancing loan on either low or nil rate of interest.” This statement shows the order issued by the Learned A.O. is in itself impugned and invalid as it is based on wrong facts. In actual the Learned A.O. has issued show cause notice upon the assessee on date 14.12.2016 requiring him to produce the complete details of interest expenses and interest income including rate of interests in both the case. In response to such notice the assessee has provided complete details of interest paid and interest received which are reproduced herewith on paper book page no. 7 to 8. In such details it can be clearly seen that the rate of interest on interest received by the assessee on loans advanced is no lower than rate of interest on interest paid to unsecured loan parties. The rate of interest on interest received varies from 14.40 % to 15% whereas the rate of interest on interest paid to parties varies from 12% to maximum of 15.60%. This means that the assessee has not advanced loan to parties at lower rate or with an intention to incur loss.However the Learned A.O. while passing the order u/s 143(3) has not considered the details of interest paid and interest received provided by the assessee and concluded that the assessee has advanced loans to various parties at low rate or nil rate of interest as the interest expenditure is higher than the interest income. Therefore the contention of the assessing officer is not maintainable as it is not based on correct facts. Therefore such an addition which is based on assumptions or surmises or erroneous findings needs to be deleted.
Further the assessing officer has stated in its order that ‘no prudent man intentionally incur a loss by obtaining loans at higher rate of interest and advancing loans on either low or nil rate of interest.”In this regard it is to be submitted that the assessee has not acted neligigently or carelessly while borrowing money from parties. It has even not advanced money to the parties at lower rate of interest except of M/s Finesse jewels Pvt. Ltd. which is a related concern of the assessee and such advances have been made out of commercial expediency by the assessee. In such a case the assessee has not utilized the loan amount for its personal use but the purpose of taking loan was to earn the income from the investment either in 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.
Further the Learned assessing officer cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much reasonable expenditure is having regard to the circumstances of the case. Rather he must put himself 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.
