Ravi Mohan Gehi Vs DCIT (ITAT Mumbai)
Conclusion: Assessee was into arranging funds and earned interest income by refinancing to the other parties and the difference in the rates in refinancing was the income of assessee. It was the nature of the business and all the expenditure incurred in earning the income was allowable expenditure. It was only characterization whether it was relating to expenses incurred to earn income or loss incurred in the process of making the income. Therefore, interest expenditure incurred by assessee would fall under the category of loss and was allowed as an expenditure.
Held: Assessee had earned the interest income by lending to various parties and claimed interest expenditure under section 57(iii). AO observed that the interest expenditure claimed by assessee was not relating to interest income earned by assessee and no link to interest income earned by assessee. Whereas assessee had brought to notice that assessee had received an offer for lending to a property developer for ₹ 20 crores. On the basis of bank statement submitted by assessee, it was noticed that assessee had in fact made arrangement for an amount of ₹ 13.8 crores from internal source and also taken loan from other parties @ 9%. There was evidence that assessee had actually paid to M/s S LLP and there was evidence in the bank statement that assessee had borrowed funds from the parties i.e., M/s K and M/s S Ltd. No doubt the interest expenditure incurred by assessee had no link to the interest income earned by assessee. However it was noticed that assessee was regularly into arranging funds for the lending business. Since as a continuous venture in earning the interest income, it was not necessary that all the expenditure like interest had to have direct link to earning of interest income. Assessee had sufficient capital to make investment as well as lending the funds to earn interest income. In the given case assessee received a proposal from the developer and however this transaction was not materialized due to failure on the part of assessee to make arrangement of total requirement of the developer i.e. ₹ 20 crores. The intention of assessee to arrange for the above requirement and managed to arrange only ₹ 13.8 crores, remitted the above said amount to the developer and the developer had returned the same next day. It clearly indicated that assessee made effort to complete the transaction. The intention of the legislature to allow the expenditure incurred by the assessee to earn the income from other sources, which was directly linked to the earning of such income. In the given case, assessee had not incurred the expenditure directly linking the interest income but incurred the loss by arranging the funds for earning the interest income. The income alone could not be segregated without considering the object of the transaction or nature of the business of earning the interest income and the expenses includes loss vice versa. There was no doubt that assessee was into arranging funds and earned interest income by refinancing to the other parties and the difference in the rates in refinancing was the income of assessee. It was the nature of the business and all the expenditure incurred in earning the income was allowable expenditure. It was only characterization whether it was relating to expenses incurred to earn income or loss incurred in the process of making the income. Therefore, interest expenditure incurred by assessee would fall under the category of loss. Therefore, it was allowed as an expenditure.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by the assessee is against the order of Ld. Commissioner of Income Tax (Appeals)-49, Mumbai in short ‘Ld. CIT(A)’ dated 12.08.2016 for AY 201112.
2. Brief facts of the case are, assessee filed his return of income for AY 2011 – 12 on 26.09.2011 declaring total income of ₹ 1,88,99,970/–. The return of income was processed under section 143(1) of the Income Tax Act 1961 (in short The Act). The case was selected for scrutiny and notices under section 143(2) and 142(1) of the Act were issued and served on the assessee.
3. Aggrieved with the order of Ld. CIT(A), assessee filed appeal before us for sustaining the 1). disallowance of interest expenses, 2). Addition under Section 14A, 3). addition of unaccounted sales consideration, 4). non-issue of notice under section 153A and 5). levy of interest under section 234B and 234C.
4. At the time of hearing Ld AR submitted that assessee prefers to press only ground Nos. 1,2 & 3 and not presses ground No. 4 and 5. We are extracting the facts only relating to ground No. 1, 2 and 3.
5. The AO observed that assessee has claimed interest expenses of ₹ 11,98,032/– against the interest income of ₹ 49,50,210/– received from various parties under section 57(iii) of the Act. When the assessee was asked to prove the interest expenditure is out of or expended wholly and exclusively for the purpose of making or earning the income. In this connection assessee submitted as below:-
