Case Law Details
West Palm Developments LLP (Formerly West Palm Developments Pvt. Ltd.) Vs ACIT (Karnataka High Court)
Facts- The assessee was sanctioned a loan for a sum of Rs.35 Crores from Union Bank of India. The assessee paid a sum of Rs.33,50,00,000/- to Prestiges Estates Project Limited (PEPPL) as advance towards purchase of properties vide two cheques. However, on account of adverse market conditions, the assessee decided to withdraw from the transaction and requested PEPPL to refund the earnest money. PEPPL refunded the earnest money vide two cheques. The assessee thereafter lent money to other shareholders and made inter corporate deposits to the tune of Rs.35,62,450/-for which total interest earned was to the extent of Rs.2,02,52,131/- as against an interest of R s.2,84,47,557/-.
The appellant filed the ROI declaring an income of Rs.5,34,23,338/- after claiming a loss of RS,.81,95,426/- under the head ‘income from other sources’, which was arrived at after reducing the interest payable on the loan of Rs.2,84,47,557/- against the interest income of Rs.2,02,52,131/- earned from inter corporate deposits and loans to shareholders under Section 57(iii) of the Act. The ROI was taken up for scrutiny assessment and the AO passed an order making a disallowance of a sum of Rs.81,95,426/- under Section 37 of the Act.
Conclusion- Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if expenditure has resulted in actual income. As long as the purpose of incurring expenditure is to earn income, the expenditure would have to be allowed as a deduction under Section 57(iii) of the Act. Under Section 57(iii) of the Act a nexus between the expenditure and income has to be ascertained. The assessee was therefore, entitled to deduction under Section 57(iii) of the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee against the order dated 24.06.2016 passed by Income Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal’ for short). The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by an order dated 20.09.2018 by a bench of this Court on the following substantial questions of law:
(a) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that on the borrowings in question, the appellant was neither entitled to claim any deduction under Section 57(iii) of the Income Tax Act, 1961nor for a deduction under Section 36(1)(iii) of the Act?
(b) Whether on the facts and in the circumstances of the case, the finding of the Income Tax Appellate Tribunal, that the appellant had failed to prove its contention in the alternative that he borrowings in question were made for business purposes, is perverse?
(c) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has not been justified in making the observations that the deduction as claimed was not allowable not only in excess of interest expenditure over interest earned, but also the entire interest expenditure incurred on the borrowings in question?
2. Facts leading to filing of this appeal briefly stated are that the assessee is engaged in development and purchases, sells, constructs and leases properties. The assessee was sanctioned a loan on 26.09.2008 for a sum of Rs.35 Crores from Union Bank of India. The assessee paid a sum of Rs.33,50,00,000/- to Prestiges Estates Project Limited (hereinafter referred to as ‘the PEPPL’ for short) as advance towards purchase of properties vide cheques dated 30.09.2008 and 13.10.2008. However, on account of adverse market conditions, the assessee decided to withdraw from the transaction and requested PEPPL to refund the earnest money. PEPPL refunded the earnest money vide cheques dated 23.10.2008 and 29.10.2008. The assessee thereafter lent money to other shareholders and made inter corporate deposits to the tune of Rs.35,62,450/-for which total interest earned was to the extent of Rs.2,02,52,131/- as against an interest of R s.2,84,47,557/-.
3. The appellant filed the return of income for the Assessment Year 2009-10 declaring an income of Rs.5,34,23,338/- after claiming a loss of RS,.81,95,426/- under the head ‘income from other sources’, which was arrived at after reducing the interest payable on the loan of Rs.2,84,47,557/- against the interest income of Rs.2,02,52,131/- earned from inter corporate deposits and loans to shareholders under Section 57(iii) of the Act. The return of income was taken up for scrutiny assessment and the Assessing Officer passed an order on 30.11.2011 making a disallowance of a sum of Rs.81,95,426/- under Section 37 of the Act. The aforesaid order was challenged before the Commissioner of Income Tax (Appeals) and was upheld by an order dated 25.09.2013. The tribunal dismissed the appeal by an order dated 24.06.2016. In the aforesaid factual background, this appeal has been filed.
4. Learned counsel for the assessee submitted that deduction for interest paid to Union Bank of India ought to have been allowed under Section 57(iii) of the Act. It is also urged that authorities could not have gone into the motive of the transaction. Alternatively it was urged that if the borrowing is for the purpose of business, the interest paid thereon would be allowable under Section 36(i)(iii) of the Act. It is urged that in any case, the tribunal does not have the power to take back the benefit granted by the Assessing Officer. In support of aforesaid submissions, reliance has been placed on decisions in ‘SETH R DALMIA VS. CIT’, (1977) 110 ITR 644 (SC), ‘CIT VS. RA.7ENDRA PRASAD MODDY’, (1978) 115 ITR 519 (SC), ‘CIT VS. GORAWARA PLASTICS AND D GENERAL INDUSTRIES (P.) LTD.’, (2007) 167 TAXMAN 174 (ALLAHABAD).
5. On the other hand, learned counsel for the revenue submitted that provisions of Section 36(i)(iii) of the Act are not attracted to the facts of the case as the amount in question did not remain with the assessee for the purpose of business. It is also urged that the question of application of Section 57(iii) of the Act does not apply as the amount in question is interest free. It is submitted that the order passed by the Assessing Officer and the tribunal do not call for any interference.
6. We have considered the submissions made by learned counsel for the parties and have perused the record. Section 57(iii) of the Act mandates that income chargeable under the head ‘income from other sources’ shall be computed after making a deduction of 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. Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if expenditure has resulted in actual income. As long as the purpose of incurring expenditure is to earn income, the expenditure would have to be allowed as a deduction under Section 57(iii) of the Act. Under Section 57(iii) of the Act a nexus between the expenditure and income has to be ascertained. The assessee was therefore, entitled to deduction under Section 57(iii) of the Act.
7. In any case, the tribunal exceeded its jurisdiction in disallowing the entire interest expenditure and the power of the tribunal is limited to passing of the order in respect of subject matter of the appeal.
8. For the aforementioned reasons, the first substantial question of law is answered and is held that assessee is entitled to claim deduction under Section 57(iii) of the Act. The first substantial question of law is answered accordingly. The second and third substantial questions of law are answered in the affirmative and in favour of the assessee.
In the result, the order dated 14.06.2016 passed by the Income Tax Appellate Tribunal is hereby quashed. In the result, the appeal is allowed.
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