Case Law Details
Mathew Joseph Vs. ACIT (Kerala High Court)
Issue- Whether the income obtained to the assessee by way of interest, by virtue of the amount advanced to a sister concern (admittedly an income from other sources coming within the purview of Section 56 of the Income tax Act) is liable to be set off against the interest paid by the assessee to his bankers in respect of a loan obtained for the export business (packing credit facility) as an eligible deduction under Section 57 (iii) of the said Act is the point to be considered and answered by this Court.
It can be seen that the appellant assessee admittedly had taken a loan from the Bankers for promotion of their export business, for which interest was payable and it was being paid accordingly. The fact that a portion of the said loan was diverted to a sister concern, who was doing some other business, earning income by way of interest (though at the same rate) was not a matter having exclusive nexus with the income and expenditure as aforesaid. This Court does not propose to go into the question whether the amount obtained by way of loan from the Bank could have been ‘legally diverted’ to some other establishment of choice of the assessee without the concurrence of the Bank. However, the fact remains that no such consent or concurrence was obtained and no document was produced to hold that it was a transaction permitted by the Bankers of the assessee.
Held- law declared by the Apex Court in Gopinathan’s case was correctly applied by the assessing authority/ appellate authority/ Tribunal to the case in hand and no distinction has been made out by the appellant assessee to take a different view. We answer the substantial question as to the scope and applicability of Section 57(iii) in the instant case against the appellant assessee and in favour of the Revenue.
JUDGMENT
P.R. Ramachandra Menon, J.
Whether the income obtained to the assessee by way of interest, by virtue of the amount advanced to a sister concern (admittedly an income from other sources coming within the purview of Section 56 of the Income tax Act) is liable to be set off against the interest paid by the assessee to his bankers in respect of a loan obtained for the export business (packing credit facility) as an eligible deduction under Section 57(iii) of the said Act is the point to be considered and answered by this Court.
2. On losing the battle before the Assessing Authority, the first Appellate Authority and also before the Income Tax Appellate Tribunal, the assessee has come up before this Court, raising two questions as substantial questions of law, in the following terms:z
“1. Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in disallowing the interest paid on bank loan, utilized for advancing to M/s. Capricon Shopping Complex from the interest received on the said advance?
2. Whether there were materials for the Appellate Tribunal to hold that the plea of set off could not be allowed on the ground that the interest on the O/D loan could not remain unadjusted?”
3. The appeal preferred under Section 260A of the Income Tax Act was admitted by this Court on 24.05.2010 framing the following substantial question of law:
“Whether there were materials for the Appellate Tribunal to hold that the plea of set off could not be allowed on the ground that the interest on the O/D loan could not remain unadjusted?”
Once a substantial question of law is framed by this Court, in terms of Section 260A of the Income Tax Act, it is open to consider the other substantial questions of law as well, if any. We heard both the sides accordingly.
4. The sequence of events reveals that the assessee, who is running an establishment under the name and style as ‘Palm Fibers & Yarn Trading Company’ had filed his return for the assessment year 1997-98, declaring the total income of Rs. 32700/-, followed by a revised return filed in December, 1997. The same was processed under Section 143(1)(a) of the Act. But later, on observing that the income received by the assessee from his sister concern was not shown in the return and that the same had escaped assessment, notice under Section 143(2) was issued and further proceedings were pursued accordingly.
5. It was the contention of the assessee before the assessing authority that the assessee had availed a loan from their bankers with liability to pay interest at the rate of 12% per annum. On the same day , i.e. 08.01.1992, the assessee had transferred the amount obtained from the Bank to the sister concern by name ‘Capricon Shopping Complex’, subject to payment of interest at the rate of 12% per annum, i.e., at the same rate. As such, the interest obtained from the sister concern on the amount advanced was liable to be set off against the interest paid by the assessee to the bankers, as the entire amount was exclusively used for the purpose of generating the income, which hence was liable to be deducted in terms of Section 57(iii) of the Income Tax Act. It was conceded that the income obtained from the sister concern was the ‘income from other sources’, as envisaged under Section 56 of the Act.
6. The claim was opposed from the part of the revenue and after considering the rival submissions, the assessing authority held that the main object of the loan in respect of the Packing Credit Facility obtained by the assessee from the Bank was to facilitate export business. The diversion of part of the loan to another concern, in which the assessee had an interest, was not in connection with the export business and therefore, interest received on such diverted loan was taxable as ‘income from other sources’, to which he had no direct liability to pay any interest. Reliance was also placed on the law declared by the Supreme Court in Commissioner of Income Tax vs. Dr. V. P. Gopinathan [248 ITR 449]. It was accordingly, that the assessment was finalised fixing the total liability as Rs.3,02948/- as per Annexure A order.
7. The matter was taken in appeal before the Commissioner of Income Tax (Appeals) Thiruvananthapuram. After hearing both the sides, the Appellate Authority repelled the contentions raised by the appellant and the appeal was dismissed confirming the assessment order as per Annexure B dated 17.08.2005. This led to further appeal before the Income Tax Appellate Tribunal, where the matter was argued in detail. The assessee also filed a written argument note. After considering the facts and figures, the relevant provisions of law and the binding precedents, the Tribunal declined interference and the appeal was dismissed as per Annexure C order dated 28.02.2007, holding that the Tribunal did not find any close nexus between the amount of interest earned from the M/s. Capricon Shopping Complex (the sister concern of the assessee) and the interest paid to the Bank by the assessee against the ‘Packing Credit facility’ availed for the export business. It was also observed that the attempt made by the assessee to distinguish the verdict in Gopinathan’s case (cited supra) was not successful and that there was no difference whether the deposit was made first and the loan was taken later or vice versa (with reference to the factual position involved therein) . This in turn is under challenge in the present appeal filed at the instance of the assessee, as mentioned above.
8. Mr. Gopinatha Menon, the learned counsel for the appellant/ assessee submits that the law declared by the Apex Court in Gopinathan’s case (relied on by the Departmental authorities and the Tribunal), stands entirely on a different footing, as it was a case where the loan was obtained on the strength of security on fixed deposit made in the Bank paying interest accordingly, where the deposit was already in existence . It is the contention of the learned counsel that the legal position stands explained by the Apex Court in another decision in Commissioner of Income Tax vs. Rajendra Prasad Moody [(1978)115 ITR 519], whereby it has been held that interest paid on the amount borrowed for investment in shares was an allowable expenditure under Section 57(iii) of the Act, whether or not the shares have yielded any return in the form of dividend during the relevant assessment year. Reliance is also sought to be placed on the verdict passed by a Division Bench of the Delhi High Court in Vodafone South Limited vs. Income Tax [2015(378 ITR 410], which was rendered by placing reliance on the decision of the Apex Court in Rajendra Prasad Moody’s (cited supra) case.
9. The learned Standing Counsel for the respondent Department submits that the idea and understanding of the assessee is thoroughly wrong and misconceived. To apply Section 57(iii) of the Act and to set off the income generated against the interest paid to the Bank of the assessee, there had to be close nexus between the two transactions, which has been analyzed and found against the assessee, at all the three different levels. A concurrent fact adjudication has been done by the Assessing authority, Appellate authority and also by the Tribunal, and as such a further scrutiny is not possible in terms of Section 260A of the Act before this Court, as no substantial question of law is involved and that the position stands covered by the verdict passed by the Apex Court in Gopinathan’s case (cited supra). The decisions sought to be relied on by the assessee in Rajendra Moody’s case and that of the Delhi High Court in Vodaphone’s case are not applicable, because of the difference in the factual context discussed by the Apex Court/ Delhi High Court in the said cases. There was no dispute to the factual position discussed by the assessing/ appellate authority/ Tribunal and there was no case that a perverse finding on fact was there, so as to constitute a question of law. Gopinathan’s case was cited and the assessing officer relied on the said case only to show that there was ‘no nexus’ between the two instances of borrowing and lending. In the decision rendered by the Apex Court in Rajendra Prasad Moody’s case and by the Delhi High Court in Vodaphone’s case, it was held, referring to the factual context, that the nexus between the two transactions had been clearly established and it was accordingly, that deduction under Section 57(iii) was allowed. As it stands so, no interference is warranted, submits the learned Standing Counsel.
10. As referred to above, the crux of the case projected by the assessee was that the amount borrowed from the Bank agreeing to pay interest at the rate of 12% per annum, was advanced to the sister concern by name ‘Capricon Shopping Complex’, on the same date, agreeing to receive income by way of interest at the rate of 12% per annum. Since the amount advanced to the sister concern was the very same amount obtained from the Bankers of the assessee and since the income generated by way of interest from the sister concern and the interest paid by the assessee to their Bankers were at the same rate (i.e. 12% per annum), it was liable to be set off in terms of Section 57(iii) of the Act . There is no dispute to the factual position that the amount borrowed by the assessee from the Bankers was for promotion of their export business – ‘Packing Credit facility’, while the amount advanced by the assessee to the sister concern was for some other purpose of the said concern. That apart, the amount disbursed by way of loan by the Bankers of the assessee for promotion of export business could not have been legally diverted by the assessee, by way of advance to anybody else, unless it was permitted by the lender Bank. The application of the relevant provisions of law has to be analyzed in the above factual background.
11. The assessee concedes that the income generated by way of interest obtained from the sister concern- Capricon Shopping Complex – in respect of the amount advanced to the said establishment was an ‘income from other sources’ as envisaged under Section 56(2)(id)) of the Act. The claim is only that it is subject to the deduction under Section 57(iii) of the Act.
12. Section 57(iii) reads as follows:
“57. Deductions:- The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely:-
(i) xx xx xx
(ii) xx xx xx
(iii) 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.”
From the mandate of Section 57 of the Act, it is quite evident that the income chargeable under the head -”income from other sources” shall be computed after deducting 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 as stipulated under Section 57 (iii) of the Act. Whether this requirement is satisfied in the instant case or whether it can be inferred applying the judicial precedents cited across the bar to the given set of facts and circumstances, is the point to be looked into.
13. In so far as the verdict passed by the Apex Court in Rajendra Prasad Moody’s case is concerned, it was pursuant to a reference made by the Tribunal to the Court under Section 256 of the IT Act, in view of a conflict in the decisions of the High Courts on the question as to whether interest on monies borrowed for investment in shares is an allowable expenditure under Section 57(iii) of the Act, when the shares had not yielded any return in the shape of dividend during the relevant assessment year. The Bench observed, with reference to the mandate under Section 57(iii) of the Act, that the expenditure to be deductible under Section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. The stand of the Revenue that, unless income was generated in a particular year, there could not be any admissibility of the expenditure under section 57(iii) (taking the generation of income as sine qua non), was held as not liable to be sustained. In the said case, the amount borrowed was invested in shares and the interest paid on the borrowed amount was sought to be deducted in terms of Section 57(iii) of the Act. The Bench observed that, what Section 57(iii) requires is that expenditure must be laid out or expended wholly or exclusively for the purpose of making or earning income; adding that, it is the ‘purpose of the expenditure’ that is relevant in determining the applicability of Section 57(iii) and that purpose must be making or earning of income. It was also observed that Section 57(iii) does not require that, this purpose must be fulfilled in order to qualify the expenditure for deduction or that the expenditure shall be deductible only if any income was made or earned. The Apex Court made it clear that the language used under Section 57(iii) did not suggest that the purpose for which expenditure was made should fructify into any benefit by way of return in the shape of income and hence the plain natural construction of the language of Section 57(iii) would irresistibly lead to the conclusion that, to bring a case within the section, it was not necessary that any income should in fact have been earned as a result of the expenditure. The view taken by various High Courts including this Court in M.N. Ramaswamy Iyer vs. CIT(1969) (71 ITR 218) was held as correct and the contrary view taken by the Patna High Court and Calcultta High Court in Maharajadhiraj Sir Kameshwar Singh vs. CIT [ ( 1957) [32 ITR 377 (Pat)] and in Madanlal Sohanlal vs. CIT [(1963) [47 ITR 1 (Cal)] respectively was held as incorrect. Reference was answered accordingly in favour of the assessee and against the Revenue.
14. Applying the above dictum to the given set of facts and circumstances, it can be seen that the appellant assessee admittedly had taken a loan from the Bankers for promotion of their export business, for which interest was payable and it was being paid accordingly. The fact that a portion of the said loan was diverted to a sister concern, who was doing some other business, earning income by way of interest (though at the same rate) was not a matter having exclusive nexus with the income and expenditure as aforesaid. This Court does not propose to go into the question whether the amount obtained by way of loan from the Bank could have been ‘legally diverted’ to some other establishment of choice of the assessee without the concurrence of the Bank. However, the fact remains that no such consent or concurrence was obtained and no document was produced to hold that it was a transaction permitted by the Bankers of the assessee. The verdict passed by the Apex Court in Rajendra Prasad Moody’s case does not come to the rescue of the appellant/assessee, having failed to establish the ingredients of Section 57(iii).
15. Coming to the decision rendered by the Delhi High Court (following the verdict of the Apex Court in Rajendra Prasad Moody’s case) and sought to be relied on by the appellant/ assessee, the question of law framed by the Court at the time of admitting the appeal, as given in paragraph ‘9’ is in the following terms:
“Did the Tribunal fall into error of law in holding that the expenditure on interest claimed by the Assessee could not be allowed in terms of Section 5 7(iii) of the Income Tax Act, 1961?”
The scope of the verdict passed by the Apex Court in Rajendra Prasad Moody’s case was discussed in paragraph 15 and some other decisions on the point have also been discussed in the subsequent paragraphs. The legal position as regards deduction under Section 57(iii) of the Act was summarized in paragraph 20 which reads as follows:
“20. The legal position as regards deduction under Section 57(iii) of the Act of expenditure laid out or expended wholly or exclusively for the purpose of making or earning ‘income from other sources’ may be summarized as under:
(i) For the purpose of the deduction in terms of Section 57(iii) the test is not whether the transaction for which the expenditure was laid out was a prudent one which resulted in the ultimate gain to the Assessee, but whether it was properly entered into as a part of the Assessee’s legitimate commercial undertaking in order indirectly to facilitate the carrying on of its business.
(ii) The expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. In other words, if it is such expenditure as a prudent businessman would incur for the purpose of business .
(iii) Once it is established that there was nexus between the expenditure and the purpose of the business, not necessarily the business of the Assessee itself, the Revenue cannot put itself in the armchair of the businessman and decide how much of the expenditure is reasonable having regard to the circumstances of the
(iv) Where in the pre- operative phase the surplus funds borrowed for the purpose of business are kept by an Assessee in fixed deposits, the interest earned thereon would be ‘income from other sources’. The interest paid on the loan borrowed would not be permitted to be netted against such interest income in the pre- operative phase.
16. The Delhi High Court took note of the concurrence given by the Bankers to the assessee to advance loan to others, utilizing the amount borrowed from the Bank, as specifically adverted to in ‘paragraph 22’, which reads as follows:
“22. In the present case, the advancing of loan to SCL was a business decision taken by the Assessee out of commercial expediency. Further, the sanction letter of HSBC made it clear that the Assessee could draw loans upto the sanctioned limit as and when needed. The sanction letter also permitted the Assessee to further utilise the money borrowed to advance loans to others. The sum of Rs.25 crores drawn by the Assessee on 24th December 2001 in terms of HSBC’s sanction letter was transferred to SCL on the very same date. Without the facility of credit by the HSBC, the Assessee could not have advanced the loan to SCL. Therefore, there was a direct nexus between the earning of interest on the loan advanced by the Assessee to SCL and payment of interest to HSBC on the loan drawn in terms of the sanction letter dated 2nd August 2001. The income earned on the loan advanced to SCL was rightly offered to tax by the Assessee as ‘income from other sources’. Since the interest paid to HSBC on the loan availed was in the nature of an expenditure wholly and exclusively laid out for the purpose of earning the interest income, it ought to be permitted to be netted against such ‘income from other sources’ in terms of Section 57(iii).
From the above, it is quite clear that the Bankers of the assessee therein had clearly permitted the assessee to divert the amount granted as loan for advancing loans to others (of choice of the assessee) and as such, the income generated by way of interest from the latter transaction could be set off against the expenditure paid by the assessee to the Bankers since the direct nexus between earning of interest on the loan advanced by the assessee and payment of interest on the loan drawn was clearly established. The transaction in the case of the appellant assessee stands entirely on a different footing and such nexus has not been established for the reasons mentioned above. That apart, in the instant case, no permission was granted by the Bankers of the assessee to have the loan amount disbursed to the assessee for promotion of the export business, to be diverted and given by way of loan to the sister concern of the assessee or anybody else, to have legally generated any income and to have it connected with the expenditure incurred for procuring the amount, which was advanced as loan. This being the position, the verdict passed by the Delhi High Court does not come to the rescue of the appellant assessee.
17. With regard to the law declared by the Apex Court in Gopinathan’s case, it arose from the verdict passed by this Court rendered in CIT vs. Dr.V.P. Gopinathan[(1998)[229 ITR 801(Ker.)]. The matter had come up for consideration before this Court, to consider two questions at the instance of the Revenue as noted below:
“ 1. Whether on the facts and in the circumstances of the case, the assessee is to be assessed on the gross amount of interest received by him on his fixed deposit or on the interest received as reduced by the amount of interest paid on the loan taken on the security of such deposit
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding,
(i) the act of making deposit and the act of borrowing on such deposit cannot be viewed as representing two different transactions?
(ii) there is thus a nexus between the deposit and the borrowing?
(iii) the principle of mutual dealings could be inferred?”
This Court answered the questions in favour of the assessee which made the Revenue to take up the matter before the Apex Court. It was a case where the assessee had effected some fixed deposits in the Bank and had earned interest of Rs. 117444/- thereon during the assessment year in question. The assessee had taken a loan from the Bank on the security of the above Fixed Deposit and had paid a sum of Rs. 90410/- to the Bankers. It was accordingly, that the assessee had claimed that he could be taxed only on the differential amount of Rs. 27034/- The claim was rejected by the assessing authority and the first appellate authority; whereas it was allowed by the Tribunal taking a contrary view, which led to the appeal filed by the Revenue before this Court raising the questions as aforesaid and inviting the judgment as mentioned already.
18. In appeal, after hearing both the sides, a finding was rendered by the Apex Court in the following terms:
“ 3. It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is : does it make any difference that he took the loan from the same bank in which he had placed the fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank.
From the above, it is quite clear that the point considered by the Apex Court was whether there was any nexus between the two transactions, to have the benefit flowing from the Section 57 (iii) of the Act , which contention was also there, as put forth by the learned counsel for the assessee before the Tribunal, which was taken note of in the following terms:
“Learned counsel appearing for the assessee before the Tribunal had made it clear that the assessee’s case did not rest upon the provisions of Section 57(iii) of the Act. In other words, it was not the contention of the assessee, very rightly, that he was paying interest to the bank to facilitate the earning of interest from the bank.”
19. A copy of the certificate dated 20.01.2001 issued by the Bankers of the assessee is placed for perusal of this Court, by the learned counsel for the assessee, which reads as follows:
“ We hereby certify that we have paid on 8.1.1992 cheque No. 540585 for Rs. 20,65,000/- issued by M/s.Palm Fibre & Yarns Trading Company (A/c. No. 906) favoring M/s. Capricon Shopping Complex”
The above certificate is not enough to establish the nexus between the income and the expenditure to be within the purview of Section 57(iii) of the Act.
20. We are of the view that the law declared by the Apex Court in Gopinathan’s case was correctly applied by the assessing authority/ appellate authority/ Tribunal to the case in hand and no distinction has been made out by the appellant assessee to take a different view. We answer the substantial question as to the scope and applicability of Section 57(iii) in the instant case against the appellant assessee and in favour of the Revenue. The appeal stands dismissed accordingly.
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