AI Structured Summary
Not yet generated for this judgment
Judgment
Per Renu Jauhri, Accountant Member:
These cross appeals filed by the Revenue (ITA No.- 5302/Del/2018) and Assessee (ITA No.- 5318/Del/2018) are directed against the order dated 08.05.2018 of the ld. Commissioner of Income Tax (Appeals-42, New Delhi, [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the assessment order dated 31.03.2016 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) by the DCIT, Circle-1(2)(2), International Taxation, New Delhi (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2013-14.
Ground of appeal filed by the assessee are reproduced as under:
“ 1. The action of the ld. CIT (A)-42 and assessing officer for disallowing Rs.2,74,12,700/- claimed as expense u/s 57 of the act is unjust, arbitrary and against the fact as necessary documents were filed serving as an evidence for the claim.
2.The Ld CIT (A) and assessing officer has failed to appreciate the fact that if the amount borrowed would have been repaid in whole then the assessee won't be able to earn interest income. Hence, the claim of expense has a direct nexus with the income earned
3.The Ld CIT (A) and assessing officer has failed to appreciate the fact that in any case the Interest from bank amounting to Rs. 18,99,812/- was earned on borrowed funds which remain unutilized for some period and the assessee has earned interest in his bank account.
4.That the Ld CIT (A) and AO erred on fact and in law in passing the impugned assessment order without appreciating the facts of the case of the appellant. The disallowance of expense claimed under section 57 should be allowed.
5.The action of the Ld CIT (A)-42 and AO for addition made u/s 112(1) of the Income Tax Act, 1961 of Rs. 96,32,75,392/- as a Capital gain on sale of shares, is unjust, arbitrary and against the fact as necessary documents were filed as an evidence for the explanation given in respect of the share loan given to his mother. Further all the relevant information had been filed before the assessing officer during the assessment proceedings
6.The Ld CIT (A) 42 and AO grossly failed to realize that the assessee has given the loan in the form of shares without relinquishing his ownership rights and no payment was received for the same.
7.The addition made in the income as capital gain under the Act should be deleted.
8.That the Ld CIT (A) and AO erred on facts and in law in charging interest under sections 234A, 234B and 234D of the Act.
9.The appellant craves for leave to amend, alter or add any other ground(s) of appeal.
Grounds of appeal filed by the Revenue are reproduced as under:
“ 1. Whether on the facts and circumstances of the case and on the basis of law, the Ld. CIT(A) has erred in allowing the claim of deduction of Rs. 57,95,783/- under section 57(iii) of the Income-tax Act, 1961 against the interest income of Rs. 1.10,52,003 earned on Loan of Rs. 31 Cr. advanced to M/s Birdie & Birdie without considering the fact that there was no nexus between the interest earned and the expense made as the loan was taken for a different purpose of buying shares etc. and the money was advanced to Birdie & Birdie out of own funds of the assessee.
2.Whether on the facts and circumstances of the case and on the basis of law, the Ld. CIT(A) has erred in holding that the deduction u/s 54F is to be allowed to the asssessee even though no such claim was made in the return of income or during the course of assessment and 2. thus the ratio of decision in the case of M/s Abhinitha Foundation Pvt Ltd. [2017] 249 Taxman p37 (Madras) was not applicable in the instant case being distinguishable on facts as in that case the assessee had produced details during the course of assessment.
3.Whether on the facts and circumstances of the case and on the basis of law, the L.d. CIT(A) has erred in holding that the loss in F&O of Rs. 2,25,85,713 was to be allowed to be set off even though the return of income was not filed in time and no such claim was made during the course of assessment and also the ratio of decision in the case of M/s Abhinitha Foundation Pvt Ltd. [2017] 249 Taxman p37 (Madras) was not applicable in the instant case being distinguishable on facts as in that case the assessee had produced details during the course of assessment.
4.The appellant craves to add. amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.”
As common issues are involved in both these appeals and these are being disposed off by a common order.
Brief facts of the case are that the assessee filed his return for A.Y. 2013-14 declaring income of Rs. 1,02,000/-. The case was selected for scrutiny and assessment was completed u/s 143(3) vide order dated 31.03.2016 at an income of Rs. 99,74,85,880/-after making the following additions:
| (i) | Long term capital gain | Rs. 96,32,75,392/- |
| (ii) | Disallowance out of interest u/s 57(iii) | Rs. 3,32,08,483/- |
| (iii) | Disallowance of claim of deduction u/s 54F | Rs. 1,32,74,74,160/- |
| (iv) | Set off of short-term capital loss not allowed | Rs. 2,25,85,713/- |
Aggrieved, the assessee preferred an appeal before the CIT(A). vide order dated 08.05.2018, the CIT(A) allowed part relief to the assessee. Against his order, both the assessee and the Revenue have filed cross appeals before the Tribunal. As some of the grounds in the appeals are connected, and these are being taken up together.
Ground no. 1 to 4:- Disallowance of interest expenditure u/s 57(iii)
Relevant facts are that the assessee has advanced loans to M/s Birdie & Birdie (B & B) amounting to Rs. 8 crores in A.Y. 2012-13 and Rs. 40 crores in A.Y. 2011-12. These were claimed to have been made out of unsecured loans taken from Sundry Parties in earlier years. During the year, the assessee received a loan of Rs. 100 crores from M/s Religare Securities Ltd. (RSL) and advanced Rs. 31 crores to M/s Birdie & Birdie. The loan from RSL was repaid during the year and the advance of Rs. 31 crores were also repaid by M/s (B & B) to the assessee. Despite this repayment, the unsecured borrowings as on 31.03.2013 were 24.00 crores as against Rs. 22.27 crores as on 31.03.2012. The assessee claimed that these were a direct nexus between the loans advanced to M/s B & B and the borrowed funds and therefore claim of interest paid was fully allowable u/s 57(iii) of the Act. The Ld. AO, after examining the relevant bank statements, disallowed the interest paid of Rs. 33208,483/- u/s 57(iii) of the Act. The Ld. CIT(A) bifurcated the loans advanced to M/s B & B in 3 distinct transactions, and allowed only a portion of the interest paid which was calculated on daily basis method, amounting to Rs. 57,95,783/- and upheld the disallowance to the extent of Rs. 2,74,12,700/-.
Before us, the ld. AR has argued at length that total investments / advances have to be considered as a common pool of funds and should not be bifurcated as done by ld. CIT(A). He has furnished the following comparative table in this regard:
Ld. DR, on the other hand, has supported the order of the AO on this issue.
We have heard the rival submissions and perused the material available on record. We note that Ld. CIT(A) has examined the nexus between the interest paid on loans with the investments on which income has been earned to ascertain the allowability of interest expenditure u/s 57(iii) of the Act. Details of interest income earned and interest paid during the year, as noted by the CIT(A), are reproduced below:
“5.3At the outset, the facts of the case are that the assessee has earned interest of Rs. 3,32,08,483/- against which he has claimed deduction of Rs. 3,32,08,483/-u/s 57 reducing the income from other sources to NIL. During the assessment proceedings, the assessee has furnished interest income vide submission dated 21.03.2016 as under:-
S. NO. Particulars Amount 1 Interest from M/s Birdie & Birdie Realtors Pvt. Ltd. 3,13,08,671/- 2. Interest from Saving Bank 18,99,812/- Total Interest Earned 3,32,08,483/- 5.4The appellant made interest payment of Rs. 33,13,86,521/- during the year. The details of the same are tabulated below:
| S. No. | Name & Address of whom loan has been taken | Interest paid during the year |
| 1. | Adept Creation Pvt. Ltd. | 4,64,73,501/- |
| 2. | Best Health Care Pvt. Ltd. | 7,03,91,277/- |
| 3. | Fern Healthcare Pvt. Ltd. | 7,03,91,276/- |
| 4. | Vitoba cosmetic Pvt. Ltd. | 4,55,58,114/- |
| 5. | Modland Wears Pvt. Ltd. | 1.22.12,566/- |
| 6. | RHC Holdings Pvt. Ltd. III | 5,44,25,500/- |
| 7. | Religare Securities Ltd. | 3,19,34,287/- |
| Total | 33,13,86,521/- |
The observations of Ld. CIT(A) in respect of the three components of loans given on which interest has been earned are reproduced as under:
“ 5.8 Loan of Rs. 8 Crore was initially advanced to M/s Birdie & Birdie Realtors Pvt. Ltd. in the A.Y. 2012-13 and interest of Rs. 45,85,435/- was earned during the subject year. Further, loan of Rs. 40 Crore was also advanced in A.Y. 2011-12 and interest of Rs. 1,56,71,233/- was earned during the subject year. Loan of Rs. 31 Crore was given during the subject year and interest of Rs. 1,10,52,003/- was earned on the same during the year.
Loan 1 of Rs. 8 Crore:-
5.9As regards the Loan of Rs. 8 crore, the appellant clarified that the same was advanced to M/s Birdie & Birdie in April 2011 out of the return of loan amount from Smt. Shabnam Dhillon. The appellant clarified that the sum of Rs. 9 crore was given to Mrs. Shabnam Dhillon on 07.1.2011 out of the sale consideration of 27,60,000 shares of M/s Religare Enterprises Ltd. (REL) amounting to Rs. 125.58 crore (@Rs.455/- per share). The appellant furthermore explained that 27,60,000 REL shares were sold out of 62,50,000 shares of REL. which were acquired on 02.06.2006 at rate of Rs. 10/- per share out of the borrowed fund from M/s RHC Holdings Pvt. Ltd. The loan of Rs. 9 crore advanced to Smt. Shabnam Dhillon was received back in April, 2011 and then, thereafter, same amount was advanced to M/s Birdie & Birdie.
5.10I find that the immediate source of financing loan of Rs. 8 Crore to M/s Birdie & Birdie was out of receipt back of advance of Rs. 9 crore to Smt. Shabnam Dhillon which in turn was sourced out of sale proceeds of REL shares. The appellant contended that the REL shares were purchased on 02.06.2006 out of borrowed funds. I find that the major component of sale proceeds of REL shares on 07.01.2011 include 'capital gain' on sale of shares. Therefore, it is wrong on the part of the appellant to conclude that the loan of Rs. 8 crore to M/s Birdie &Birdie was out of borrowed funds. In other words, there is no interest expenditure incurred by the assessee in order to earn the interest income of Rs. 45,85,435/ on loan of Rs. 8 crore to M/s Birdie & Birdie. Since, the appellant has failed to meet the basic condition of Section 57(iii) of the IT Act, therefore, the question of deduction of interest expenditure against interest earned on loan of Rs. 8 crore does not arise.
Loan 2 of Rs. 40 Crore:-
5.11As regards the Loan of Rs. 40 crore, the appellant clarified that the same was advanced to M/s Birdie & Birdie on 07.01.2011 out of sale proceeds of 27.6 lakh shares of REL for a consideration of Rs. 125.58 crore (@Rs.455/- per share) on 07.01.2011. The appellant furthermore explained that 27,60,000 REL shares were sold out of 62,50,000 shares of REL. which were acquired on 02.06.2006 at rate of Rs. 10/-per share out of the borrowed fund of M/s RHC Holdings Pvt Ltd.
5.12I find that the immediate source of financing loan of Rs. 40 Crore to M/s Birdie & Birdie was out of sale proceeds of REL shares. The appellant contended that the REL shares were purchased on 02.06.2006 out of borrowed funds. I find that the major component of sale proceeds of REL shares on 07.01.2011 include 'capital gain' on sale of shares. Therefore, it is wrong on the part of the appellant to conclude that the loan of Rs. 40 crore to M/s Birdie & Birdie was out of borrowed funds. In other words, there is no interest expenditure incurred by the assessee in order to earn the interest income of Rs. 1,56,71,233/- on loan of Rs. 40 crore to M/s Birdie & Birdie. Since, the appellant has failed to meet the basic condition of Section 57(iii) of the IT Act, therefore, the question of deduction of interest expenditure against interest earned on loan of Rs. 40 crore does not arise.
5.13As regards the loan of Rs. 31 crore to M/s Birdie &Birdie on 24.08.2012, the same has been sourced out of loan of Rs. 100 crore from M/s Religare Securities Ltd. on 24.08.2012 on which the assessee has earned interest of Rs. 1.10 crore. The copy of Axis Bank's A/c statement has been placed on file to corroborate the submission of the assessee.
5.14The assessee has received interest of Rs. 1,10,52,003/- on the loan amount of Rs. 31 crore. As the assessee has clearly highlighted the direct linkage of loan of Rs. 100 crore from M/s Religare Securities Ltd with the loan of Rs. 31 crore advanced to M/s Birdie & Birdie with the help of bank account statement, therefore, the assessee is eligible for deduction u/s 57(iii) of the IT Act. In other words, the interest expenditure on loan amount of Rs. 31 crore out of Rs. 100 crore taken from M/s Religare Securities Ltd has been laid out or expended wholly and exclusively for the purpose of earning interest income in respect of loan of Rs. 31 crore advanced to M/s Birdie & Birdie.
5.15In order to calculate the amount of interest expended on loan of Rs. 31 crore from M/s Religare Securities Ltd, it is noted that for the period of 24.08.2012 to 28.03.2013, the outstanding balance to M/s Religare Securities Ltd. on account of loan amount was more than Rs. 31 crore. In other words, for the period 24.08.2012-28.03.2013, the loan amount to the extent of Rs. 31 crore from M/s Religare Securities Pvt. Ltd. remained with the assessee. The movement of funds advanced to M/s Birdie &Birdie has been captured in the table below in order to work out the interest expenditure on the loan taken from M/s Religare Securities Ltd. for the period 24.08.2012-31.03.2013.
As per the table, a sum of Rs. 57.95.783/- as paid to M/s Religare Securities Ltd. and the same needs to be allowed as expenditure against the interest income of Rs.1,10,52,003/-. Accordingly, a sum of Rs. 57,95,783/- is allowable as deduction u/s 57(iii) of the act because the same has been sourced out of the loan taken from M/s Religare Securities Ltd.
As regards interest of Rs. 18,99,812/- on saving bank deposits and FDR's, the assessee has submitted vide letter dated 08/08/2017 that the interest on saving fund account has been earned by the assessee on the amount borrowed by him which remained unutilized in his bank account for few days and saving interest accrued to the assessee on theses borrowed funds which establish direct nexus between the interest paid and the interest earned. The appellant has also submitted the bank statement vide annexure no. 2 of his reply dated 08.09.2017 & detail of bank and FDR interest vide annexure no. 3 of his reply d 22.09.2017. I find that the appellant has borrowed Rs. 100 crore from M/s Religare Securities Ltd. during the subject year and the same amount has been transferred out of the bank account on the same date of receipt of the loan. The plea of the assessee, that the deposits in serving bank account are out of receipt back of funds from Smt. Shabnam Dhillon, which in turn are out of borrowed funds, cannot be accepted in absence of any documentary evidence. Accordingly, I do not find any direct linkage of borrowings with the saving deposits & FDR account. Since, the appellant has failed to meet the basic condition of Section 57(iii) of the IT Act, therefore, the question of deduction of interest expenditure against interest earned on saving and FDR deposit does not arise.”
We note that criteria for allowing the deduction u/s 57(iii) is narrower as compared to the criteria u/s 36 which uses the terms ’for the purpose of business’. On the other hand, in section 57(iii) the requirement is that the funds should be borrowed for the purposes of making or earning income.
Thus, the case laws relied upon by the assessee with regard to allowability of interest deductible under Business Income would not be applicable. The assessee has placed reliance on the decision of the Hon’ble Delhi High Court in ITA No. 100/2019 in the case of PCIT vs. Mahalaxmi Design Pvt. Ltd. in support of his claim. Upon careful perusal of the decision of the Hon’ble jurisdictional High Court, we note that, it has been held therein as under:
“….
15.From the above, it is evident that any expenditure which is laid out or expended wholly or exclusively for the purpose of earning of interest income is allowable u/s 57(iii). In the case under appeal before us, we find that the borrowed money has been utilized for the purpose of giving advances to others. There is a direct nexus between the money borrowed by the assessee and money advanced by the assessee. The assessee paid interest on the money borrowed by it and has received the interest on the money advanced by it. Therefore, we have no hesitation to hold that the interest paid by the assessee was incurred wholly and exclusively for the purpose of earning of interest income and therefore, the same was rightly claimed u/s 57(iii) and the learned CIT(A) rightly directed for allowing the same.”
It is clear from the above that the direct nexus between the money borrowed and money advanced has to be established. We are, therefore, of the considered view that Ld. CIT(A) has rightly allowed deduction u/s 57(iii) of the Act, in respect of the portion of interest paid on the part of investment which had direct nexus with the borrowed funds and the same calls for no interference. This ground of appeal of the assessee is hereby rejected.
Also, revenue’s ground no. 1 agitating the part allowance of interest by CIT(A) is also rejected, in view of above discussion.
Ground nos. 5, 6, & 7 of assessee’s appeal: Addition on account of Capital Gain on Sale of Shares (Rs. 96,32,75,392/-) &
Ground no. 2 of Revenue’s appeal: Allowance of Deduction u/s 54F
Brief facts are that the assessee held 96,73,013/- equity shares of M/s Religare Enterprises Ltd. (REL) out of which he gave 31,73,013/- shares to his mother on loan. The AO held the transaction to be a transfer on which Capital Gains were computed by adopting deemed value to consideration by invoking provisions of section 50D of the Act. It was held by the AO that ownership of shares could not have remained with the assessee since shares were transferred to the mother’s demat account.
In appeal, the Ld. CIT(A) agreed with the findings of the assessee and held as under:
“7.8I find that with the dematerialization of share certificates, the moment any share has been transferred from Demat Account of any person to the Demat Account of the other person, the right to sell that particular share lies with the recipient of the share. The transferor of shares has no control on any transaction in respect of the transferred shares once it is transferred out of the demat account of transferor. Therefore, it is evident that right of sale of share has passed on from the transferor of shares (assessee) to the transferee (mother of the assessee).. Even the company will issue the dividend in the name of the person who is holding its shares in the Demat Account. Accordingly, it is clear cut case of transfer of asset as per section 2(47) of the act.”
Without prejudice to the above, the assessee made an alternative claim that he has also purchased a residential property for a consideration of Rs. 1,32,74,74,160/-and claimed benefit of deduction u/s 54F in respect of the capital gain of Rs. 98,36,34,030/- computed by the AO on transfer of shares.
The Ld. CIT(A) noted that although the claim was not made in the return, but keeping in view that settled judicial position in this regard, directed the AO to consider and allow the claim of deduction u/s 54F o the Act. The Revenue is aggrieved with the directions of the CIT(A).
We have heard the rival submissions and perused the material available on record. We note that the impugned transaction of transfer of shares to the mother’s account by the assessee, in the name of loan, is actually a transfer of the asset under the relevant provisions relating to capital gains. We, therefore, find no infirmity in the action of the lower authorities in computing the capital gain on this transfer by invoking provisions of section 50 D of the Act. We further note that the assessee has, as an alternate plea, claimed deduction u/s 54F of the Act, on account of purchase of property which has been admitted by the CIT(A). Again, we find no infirmity in the directions of CIT(A) and hence direct the AO to examine the claim of deduction u/s 54F and allow the same as per law.
Accordingly, the grounds of appeal of assessee (ground nos. 5,6, & 7) challenging of capital gain on transfer of shares as well as ground no. 2 of the Revenue’s appeal against deduction allowed u/s 54 F by the CIT(A) are rejected.
Ground no. 3 (Revenue’ s appeal): Allowance of set off of loss in F & O (Rs. 2,25,85,713/-)
Brief facts of the case are that the assessee claimed to have incurred a loss of Rs. 2,25,85,713/- from F & O trading in shares, and same was eligible to be set-off of against any income earned during the year. However, the assessee had not claimed the said loss while filing his return of income. Since the AO has made substantial additions during the assessment proceedings and modified the Nil returned income, the assessee has subsequently submitted before the CIT(A) that he was entitled to claim the set-off of the loss against the additions made by the AO. The CIT(A), in this regard, has held as under:
“9.3The above issue was referred to the AO vide letter dated 15.11.2017 and reminder dated 25.04.2018 for necessary comments. However, no reply in this regard has been received from the AO till date. I find that in this case the assessee has not made any claim for carry forward of loss and the benefit of set off of loss is to be allowed only for the year under consideration. It may be relevant to note that Section 139(3) of the Income Tax Act provides that the loss if any should be carried forward under sub section 1 of Section 72 or sub section 2 of Section 73 or sub section 2 of Section 73A or sub section 1 or sub section 3 of Section 74, or sub section 3 of Section 74A only if the return of loss has been furnished within time allowed under sub section of 1 of Section 139 of the IT Act. It nowhere bars the set off of loss provided as per the provisions of Section 70 & 71 of the IT Act. Accordingly, the AO is directed to allow the benefit of set off of loss u/s 70 & 71 of the IT Act.
9.4It may be important to note that the issue of allowability of deduction even without its claim in the return has now been settled based on various judicial pronouncements. Hon'ble Madras High Court summed up this issue in the case of M/s. Abhinitha Foundation Pvt. Ltd. 249 Taxman p 37 at para 18 which read as under:
"In sum, what emerges from a perusal of the ratio of the judgments cited above, in particular, the judgments rendered by the Supreme Court in GOETZE's case and National Thermal Power Co. Ltd.'s case, and those, rendered by the Division Bench of this Court in Ramco Cements Ltd. and CIT vs. Malind Laboratories P. Ltd., as also the judgments of the Delhi High Court in Sam Global Securities Ltd.'s case and Jai Parabolic Springs Ltd.'s case, that, even if, the claim made by the assessee company does not form part of the original return or even the revised return, it could still be considered, if, the relevant material was available on record, either by the appellate authorities, (which includes both the CIT (A) and the Tribunal) by themselves, or on remand, by the Assessing Officer."
9.5It flows from the above decision that the claim of deduction can be entertained at the level of CIT(A) and higher appellate authorities. Accordingly, the claim of benefit of set off under section 70 & 71 of the act cannot be disallowed only on the ground that the same was not claimed in I.T. return.”
We have heard the rival submissions and perused the material available on record. We note that the claim was not made in the return or before the AO and has been made for the first time only before the CIT(A). We further note that the CIT(A) was justified in directing the AO to consider and allow the assessee’s claim for set -off of loss under sections 70 & 71 of the Act, in view of the settle legal position, on the issue regarding allowability of deduction claimed during appellate proceedings even without claiming the same in the return. Accordingly, we hereby direct the AO to consider the assessee’s claim of set-off as per applicable provision and allow the same. In the result, this ground of revenue’s appeal is rejected.
In the result, both the assessee’s and revenue’s appeals are hereby dismissed.