Case Law Details
Acuity Holdings Pvt. Ltd. Vs DCIT (ITAT Mumbai)
Undisputedly, the subject premise in respect of which the assessee has claimed the rental expenses has been taken on lease by the assessee. Though, in the leave and license agreement, it is mentioned that it has been taken on lease for the use of residence of directors/employees, however, it cannot be said that in course of such user, the directors are not doing any official work, such as, meeting the investors, etc. Therefore, merely because as per the terms of the leave and license agreement the premise is to be used foRer residence purpose of the directors, assessee’s claim cannot be rejected. The Tribunal in Stuish Capital Services Pvt. Ltd. (supra) while considering the allowability of depreciation on a premise taken on lease for use of director’s residence allowed assessee’s claim by holding that since the company is engaged in share trading, the premise is used by directors for official work also, hence, as per CBDT Circular and the decision of the Hon’ble Delhi High Court in CIT v/s Modi Industries Ltd., [1994] 210 ITR 001 (Del.), assessee’s claim is allowable. The ratio laid down in the aforesaid decision squarely applies to assessee’s case.
Interest expenditure incurred in relation to interest income earned is allowable
The short issue arising for consideration is, whether the interest expenditure incurred by the assessee is in relation to interest income earned during the year so as to allow it as deduction under section 57(iii) of the Act. It is the specific contention of the assessee that the borrowed funds on which the assessee has paid interest was utilized for investing in derivatives and NCDs. It is the claim of the assessee that in the year under consideration, it has earned interest of Rs. 1,57,55,101, on the NCDs. Therefore, a part of interest expenditure is relatable to interest earned on NCDs, hence, has to be set–off against such income. In our view, if the borrowed fund or part of it has been utilized in acquiring the NCDs, then the interest on such borrowed fund has to be set–off against the interest income earned on NCDs to the extent of utilization of borrowed funds in NCDs.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned appeal has been filed by the assessee challenging the order dated 28th February 2017, passed by the learned Commissioner of Income Tax (Appeals)–20, Mumbai, pertaining to the assessment year 2012–13.
2. In ground no.1, the assessee has challenged the disallowance of rental expenses of Rs. 65.25 lakh.
3. Brief facts are, the assessee company is engaged in the business of investment in shares, securities and derivatives. For the assessment year under dispute, the assessee filed its return of income on 20th September 2012, declaring total income of Rs. 57,47,631. Subsequently, the assessee filed a revised return of income on 11th February 2014. During the assessment proceedings, the Assessing Officer noticing that the assessee had claimed deduction of Rs. 65.25 lakh towards rental expenses called for the necessary details and asked the assessee to justify such claim. In response, it was submitted that the premises was taken on lease for setting–up a office to facilitate the directors to meet potential investors and investees with a view to explain the business activities. In support of its claim, the assessee also furnished the leave and license agreement, details of rent paid and tax deducted at source. After verifying the details furnished by the assessee and particularly the leave and license agreement, the Assessing Officer found that as per the terms of the agreement, the premise was to be used for the residential purpose of employees/directors and their family members. The Assessing Officer further observed, the reason mentioned by the assessee for acquiring the property on lease does not match with its business activity of a investor in shares which has to be transacted in recognized stock exchange and there is no need for the meeting of investors and investees. Thus, he observed, the rental expenses for lease of the premises not being for the purpose of the business has to be disallowed.
4. The learned Commissioner (Appeals) also sustained the disallowance while deciding assessee’s appeal.
5. The learned Authorised Representative submitted, the main purpose of taking on lease the premises is to facilitate the meeting with the investors which is in furtherance of the business activities of the assessee. He submitted, since the assessee is in the business of investing in shares, derivatives etc., it needs to meet with the investors regularly and frequently which is most necessary for its business activities. Further, he submitted, the subject premise is actually used for this purpose, hence, the expenditure incurred has to be allowed as business expense. Without prejudice, the learned Authorised Representative submitted, even if the premise taken on lease by the assessee is used by the directors for the purpose of their residence, the rental expenditure can be allowed as business expense since the said premise is also used by the directors for official work of the company. In support of such contention, he relied upon the following decisions:–
i) ACIT v/s Stuish Capital Service Pvt. Ltd., ITA no.5482/ Mum./2016, dated 21st May 2018; and
ii) ITA no.5083/Mum./2018 &Ors., dated 24.06.2019.
6. The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).
7. We have considered rival submissions and perused the material on record. Undisputedly, the subject premise in respect of which the assessee has claimed the rental expenses has been taken on lease by the assessee. Though, in the leave and license agreement, it is mentioned that it has been taken on lease for the use of residence of directors/employees, however, it cannot be said that in course of such user, the directors are not doing any official work, such as, meeting the investors, etc. Therefore, merely because as per the terms of the leave and license agreement the premise is to be used for residence purpose of the directors, assessee’s claim cannot be rejected. The Tribunal in Stuish Capital Services Pvt. Ltd. (supra) while considering the allowability of depreciation on a premise taken on lease for use of director’s residence allowed assessee’s claim by holding that since the company is engaged in share trading, the premise is used by directors for official work also, hence, as per CBDT Circular and the decision of the Hon’ble Delhi High Court in CIT v/s Modi Industries Ltd., [1994] 210 ITR 001 (Del.), assessee’s claim is allowable. The ratio laid down in the aforesaid decision squarely applies to assessee’s case.
Accordingly, we allow assessee’s claim of depreciation. This ground is allowed.
8. In ground no.2, the assessee has challenge disallowance of interest expenditure of Rs. 1,00,07,470.
9. Brief facts are, during the assessment proceedings, the Assessing Officer on the basis of AIR information called upon the assessee to reconcile the interest income earned by it during the year. From the details furnished, the Assessing Officer found that as against interest income earned during the year amounting to Rs. 1,57,55,088. The assessee had claimed interest expenditure on pro–rata basis. On further query from the Assessing Officer, the assessee submitted that it had incurred interest expenditure of Rs. 1,35,29,967, against loan taken from India Infoline Investments Services Ltd. and the said loan amount was utilized for trading in derivatives and non–convertible debenture (NCD). Whereas, it has received interest income on NCDs amounting to Rs. 1,57,55,088. It was submitted, since the borrowed fund was utilized for trading in derivative and NCDs, the interest expenditure on such loan has to be set–off against the interest income earned on NCDs. The Assessing Officer, however, did not find merit in the submissions of the assessee. Holding that the assessee failed to provide any justification for claiming interest expenditure on pro–rata basis, he disallowed interest expenditure of Rs. 1,00,07,470. Though, the assessee challenged the aforesaid disallowance before learned Commissioner (Appeals), however, he also upheld the disallowance made by the Assessing Officer on the reasoning that the assessee failed to establish the nexus between the interest income and the interest expenditure as required under section 57(iii) of the Act.
10. The learned Authorised Representative submitted, the entire borrowed fund was utilized for trading in derivative and NCDs. He submitted, the assessee has earned interest income on NCDs at Rs. 1,57,55,101, whereas, it has incurred total interest expenditure of Rs. 1,35,29,967. He submitted, since part of the borrowed fund was utilized in NCDs, assessee had claimed interest expenditure on pro– rata basis on the investment made in NCDs. Thus, he submitted, there being a nexus between interest expenditure and interest income, it should be allowed.
11. The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).
12. We have considered rival submissions and perused the material on record. The short issue arising for consideration is, whether the interest expenditure incurred by the assessee is in relation to interest income earned during the year so as to allow it as deduction under section 57(iii) of the Act. It is the specific contention of the assessee that the borrowed funds on which the assessee has paid interest was utilized for investing in derivatives and NCDs. It is the claim of the assessee that in the year under consideration, it has earned interest of Rs. 1,57,55,101, on the NCDs. Therefore, a part of interest expenditure is relatable to interest earned on NCDs, hence, has to be set–off against such income. In our view, if the borrowed fund or part of it has been utilized in acquiring the NCDs, then the interest on such borrowed fund has to be set–off against the interest income earned on NCDs to the extent of utilization of borrowed funds in NCDs. The aforesaid claim of the assessee, therefore, needs factual verification. In case, it is found that a part of the borrowed fund was utilized for investment in NCDs, then the interest expenditure corresponding to the borrowed fund utilized in NCDs has to be set–off against the interest earned on NCDs. With the aforesaid observation, the issue is restored back to the Assessing Officer for fresh adjudication after verification of facts on record and due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
13. In the result, appeal stands partly allowed.
Order pronounced in the open Court on 22.11.2019
Dear sir
I am working in best company and my company wants to take a flat on lease basis on my NAME for 3 years, rent is 15 Lack.
could you please help. what about tax liability and also is there in process for above. could you pl guide.
thankx
pramod sakpal