Case Law Details
Jignesh Sevantilal Shah Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that unsecured loan taken at higher rate for commercial expediency is admissible under section 57(iii) of the Income Tax Act.
Facts- During the course of assessment proceedings, the AO observed that the assessee had taken loan of Rs. 1 crore from one party to whom interest @ 21% per annum was given. Before the AO, the assessee submitted that the purpose of incurring such high interest on loan taken was owing to commercial expediency. However, the AO rejected the contentions of the assessee on the ground that assessee paid an excessive rate of interest on loan taken and restricted the interest payment to 15% on such loan taken. Accordingly, the AO made addition of differential interest of 6% to the income of the assessee, amounting to Rs. 6 lakhs.
CIT(A) dismissed the appeal of the assessee. Being aggrieved, the present appeal is filed by the assessee.
Conclusion- Held that the AO made disallowance of 6 lakhs on account of excessive interest expenses by restricting the amount of interest expenses to 15% as against 21% interest paid by the assessee to Shri Dharmesh Kumar Patel. However, the CIT(Appeals) while dismissing the appeal of the assessee held that the assessee has not been able to establish the nexus between the interest paid at 21% to Shri Dharmesh Kumar Patel and interest income earned by way of giving unsecured loan to various parties. In our considered view, the same is erroneous, since if the assessee is unable to establish the nexus between interest bearing loans and earning of interest income itself, the entire interest expense is liable to be disallowed and not part thereof as upheld by Ld. CIT(Appeals).
Further, even in the assessment order, the assessing officer has not challenged the fact that assessee has not been able to establish the nexus between interest taken at 21% and the earning of interest income by the assessee. Further, both the AO and CIT(Appeals) have not been able to controvert the commercial expediency demonstrated by the assessee for incurring a higher rate of 21% interest on loan taken from Shri Dharmesh Kumar Patel, given the facts of the instant case. Therefore, in our considered view, the assessee has been able to establish both the commercial expediency for taking the interest at higher rate of 21% (since the same was required by the assessee on urgent basis to be given to the firm in which the assessee was a Director) and has also been able to establish the nexus as required under section 57 of the Act.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the assessee against the order of National Faceless Appeal Centre (NFAC), Delhi, in proceeding u/s. 250 of the Act, vide order dated 17/05/2022 for Assessment Year 2018-19.
2. The assessee has raised the following grounds of appeal:-
“1 The order passed u/s 250 on 17-05-2022 for A.Y. 2018-19 by CIT (A) upholding the addition of Rs. 6,00,000/- made by AO disallowing out of claim of interest as interest paid @ 21% to one person is excessive considering rate of interest in case of other person is wholly illegal, unlawful and against the principles of natural justice.
2. Both authorities have grievously erred in holding the impugned addition of Rs. 6,00,000/- without considering commercial expediency to borrow fund to meet with urgent need in business and even after above interest there is net interest income though the same was explained.
3. That in the facts and circumstances of the case as well as in aw, the Ld. CIT (A) ought not to have upheld the addition of Rs. 6,00,000/- being disallowed out of total interest claimed.
4. The appellant craves liberty to add, amend, alter or modify all or any grounds of appeal before final appeal.”
3. The brief facts of the case are that the assessee is an individual deriving income from salary from M/s Rushabhdev Infra Projects Private Limited in which is he is a Director and also earned interest income. During the year under consideration, the assessee filed return of income declaring total income of ~ 42,42,140/-. The assessee during the impugned assessment year earned gross interest income on unsecured loans given to various parties amounting to ~ 1,23,84,6 17 /- and incurred interest expenses on funds borrowed from several parties in the form of unsecured loans amounting to ~ 92,74,214/-. The case of the assessee was selected for limited scrutiny to examine the issue of “deductions from income from other sources”. During the course of assessment proceedings, the AO observed that the assessee had taken loan of ~ 1 crore from one party Shri Dharmeshkumar Patel to whom interest @ 21% per annum was given. Before the AO, the assessee submitted that the purpose of incurring such high interest on loan taken from Shri Dharmesh Kumar Patel was owing to commercial expediency. The assessee is a Director in M/s Rushabhdev Infra Projects Private Limited, which was engaged in construction business and such concern was in urgent need of funds since it was required to make payment of ~ 2.05 crores to the Ahmedabad Municipal Corporation for getting plan approved in respect of new site of the company. Accordingly, the assessee took loan from Shri Dharmesh Kumar Patel on 07-01-2017, which was given to M/s Rushabhdev Infra Projects Private Limited, which, in turn made payment of ~ 2.05 crores to Ahmedabad Municipal Corporation on 09-01-20 17. Therefore, the above flow of events shows that the loan that was taken from Shri Dharmesh Kumar Patel owing to commercial expediency and further the aforesaid loan was taken without any deposit of any security and hence higher rate of interest @ 21% was paid for such unsecured loan. However, the AO rejected the contentions of the assessee on the ground that assessee paid an excessive rate of interest on loan taken from Shri Dharmesh Kumar Patel and restricted the interest payment to 15% on such loan taken. Accordingly, the AO made addition of differential interest of 6% to the income of the assessee, amounting to ~ 6 lakhs. While making the disallowance, the AO made the following observations:
“i) From record it is seen that the assessee has in some case repaid the principle part of the loan amount and interest rates in those case are far lower than 21%. However, he has keep paying interest @ 21% to Shri DHARMESH KUMAR VASUDEVBHAI PA TEL “.
ii) New loans were also given out in some cases and some additional loans were also give to persons who had already taken loan from the The interest rates in these cases are far lower than 21% which is the interest rate paid to Shri DHARMESH KUMAR VASUDEVBHAI PA TEL, having ABYPP8092L.
keeping in view the facts and matter of the case, the interest paid by the assessee to Shri Dharmesh kumar Vasudevbhai Patel amounting to Rs. 21,00,000/- @ 21% p.a. is found at much higher side. Therefore, I am of the view that interest paid and claimed @ 21% to Shri Dharmesh kumar Vasudevbhai Patel amounting to Rs. 21,00,000/- should be restricted and to be allowed @15% p.a. for deduction purpose and interest paid to the extent of excessive rate of 6% to be disallowed. The quantum of such disallowance comes to Rs. 6.00,000/- (2100000*6/21). Accordingly disallowance of Rs.6,00,000/- out of interest expense is made and added over and above the total income declared in the ITR by the assessee and total income of the assessee is assessed u/s 143(3) of the Income Tax Act, 1961 at Rs. 5 0,27,144/-”
4. In appeal before Ld. CIT(Appeals), the assessee reiterated the submissions made before the assessing officer, however, he rejected the appeal of the assessee on the ground that assessee has failed to demonstrate how the interest paid @ 21% on aforesaid loan taken from Shri Dharmesh Kumar Patel was having any nexus with earning interest income at the prevailing rate of 6 to 12% (maximum at rate of 15%). While passing the order, Ld. CIT(Appeals) made the following observations:
“6. I have carefully considered the grounds of appeal, statement of facts, contents of assessment order and written submissions made by the appellant. As per section 57 (iii) of the Income -tax Act, deduction of any other expenditure not being in the nature of capital expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income is allowed as deduction. In the instant case, the assessee borrowed Rs. 2,05,88,000/- on 07/01/2017 from Dharmeshkumar V. Patel and gave the same on 09/01/2017 to the company Rushabhdev Infraprojects Pvt. Ltd. wherein he was a Director for making urgent payment to Ahmedabad Municipal Corporation. The appellant has failed to demonstrate how the interest paid @ 21% on aforesaid loan was having any nexus with earning interest income at the prevailing rate of 6 to 12 % (maximum at the rate of 15% ) which has been assessed to tax. The prevailing market rates for loans taken were also as indicated above. In view of above, the disallowance of Rs. 6,00,000/- made by the AO is found to be justified and the same is upheld. All the grounds of appeal are hereby dismissed.
7. Accordingly, the appeal is treated as dismissed.”
5. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) dismissing the appeal of the assessee. Before us, the counsel for the assessee submitted that both the AO and the Ld. CIT(Appeals) have not made any observations with regards to the commercial expediency which necessitated taking of loan by the assessee @ 21% from Shri Dharmesh Kumar Patel. The counsel for the assessee submitted that the AO cannot sit in judgement as to the amount of interest which is required to be paid by the assessee, since given the commercial expediency of the facts of the instant case, it is assessee who is in the best position to decide at what rate of interest the loan may be required to be taken. Further, the counsel for the assessee submitted that the revenue authorities failed to disprove any of the evidence filed by the assessee to prove the commercial expediency and establish the nexus between the borrowed funds and use thereof for urgent need of funds by the company for business purposes, in which company the assessee is an active Director. The Assessee is receiving salary from the company for actively taking interest in the management thereof. Secondly, the counsel for the assessee submitted that both the AO and CIT(Appeals) failed to consider the fact that even after claiming interest at higher rate on borrowed fund under the circumstances mentioned by the assessee, the assessee earned surplus interest income as is evident from statement of income. However, the AO did not take notice of this fact while concluding the assessment and making the impugned addition. In response, the DR relied on the observations made by the Ld. CIT(Appeals) and the AO in their respective orders.
6. We have heard the rival contentions and perused the material on record. We observe that the AO made disallowance of 6 lakhs on account of excessive interest expenses by restricting the amount of interest expenses to 15% as against 21% interest paid by the assessee to Shri Dharmesh Kumar Patel. However, the CIT(Appeals) while dismissing the appeal of the assessee held that the assessee has not been able to establish the nexus between the interest paid @ 21% to Shri Dharmesh Kumar Patel and interest income earned by way of giving unsecured loan to various parties. In our considered view, the same is erroneous, since if the assessee is unable to establish the nexus between interest bearing loans and earning of interest income itself, the entire interest expense is liable to be disallowed and not part thereof as upheld by Ld. CIT(Appeals). Further, even in the assessment order, the assessing officer has not challenged the fact that assessee has not been able to establish the nexus between interest taken @ 21% and the earning of interest income by the assessee. Further, both the AO and CIT(Appeals) have not been able to controvert the commercial expediency demonstrated by the assessee for incurring a higher rate of 21% interest on loan taken from Shri Dharmesh Kumar Patel, given the facts of the instant case. Therefore, in our considered view, the assessee has been able to establish both the commercial expediency for taking the interest at higher rate of 21% (since the same was required by the assessee on urgent basis to be given to the firm in which the assessee was a Director) and has also been able to establish the nexus as required under section 57 of the Act. In the case of Shri Kailash Chand Soni v. ACIT in ITA No. 960/JP/2019, the Jaipur ITAT while allowing the appeal of the assessee on similar facts, observed as under:
12. In the present case M/s Finesse jewels is engaged in the business of manufacturing of gems and jewellery. The assessee is a director and shareholder in such company and derives salary and commission income from such company. It has made investment in the company 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. Therefore such an advance was clearly given by the assessee for the purpose of commercial expediency.
13. Further it is to be noted that any advance made to the related/sister concern out of commercial expediency is allowable under the income tax return and any expenses claimed in respect of such advance given can be claimed as deduction u/s 57(iii) 137 of the income tax act, 1961. The ld. AR had relied upon various case laws in support of the assessee ‘s contention. Some of them are as follows:- “The issue as to whether an assessee, who had borrowed funds carrying interest and advanced part thereof to its sister concern on interest free basis, can claim deduction to that extent was considered by Hon’ble the ITA No. 960/JP/2019 Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur Supreme Court in SA Builders Limited’s case. In the aforesaid case, Hon ‘ble the Supreme Court opined that the tax authorities must not look at the matter from their own view point but that of a prudent businessman. In case, it is found that transfer of borrowed funds to a sister concern was on account of commercial expediency even if the same is interest free, the deduction claimed by the assessee cannot be disallowed.
14. We are of the view that it is not necessary that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income.
15. Further, clause (iii) to section 57 makes admissible the 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 (income chargeable under the head “income from other sources’). This means section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively ‘for the purpose of making or earning such income”. In order that expenditure may be admissible under section 57(iii), it is necessary that the primary motive of incurring it is directly ITA No. 960/JP/2019 Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur to earn income falling under the head “income from other sources”. The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qual0, the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned (CIT vs. Rajendra Prasad Moody (1978), Taxation 51 (3)-52, 115 ITR 519 (SC) : CIT vs. MurliManohar (1998) IX SITC 673 (All): CIT vs. Rampur Tirnber&Turney Co. Ltd. (1981) 129 ITR 58 (All.) : CIT vs. Administrator General of Madras (1998) 142 Taxation 85 (Mad)).
6.1 In the case of CIT v. Darashaw& Co. (P.) Ltd.49 taxmann.com 143 (Bombay), the Bombay High Court held that It cannot be said that interest expenditure on borrowed capital shall be debited, only if any income is made or earned. In the case of CIT v. Rajendra Prasad Moody115ITR519 (SC), the Hon’ble Supreme Court held that to bring a case within section 57(iii), it is not necessary that any income should in fact have been earned as a result of expenditure. Therefore, interest paid on money borrowed for investment in shares, which had not yielded any dividend, was admissible under section 57(iii) of the Act.
6.2 Considering the facts of the case and our observations made in the preceding paragraphs, we are hereby allowing the appeal of the assessee.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 19-04-2023
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