Commissioner Of Income Tax v. Harishbhai J. Lakhani....opponent(S

O/TAXAP/434/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 434 of 2006TO TAX APPEAL NO. 435 of 2006 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX....Appellant(s)Versus HARISHBHAI J. LAKHANI....Opponent(s) ================================================================ Appearance: MR PRANAV G DESAI, ADVOCATE for the Appellant(s) No. 1 MR SN SOPARKAR, SR. ADVOCATE, MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERIandHONOURABLE MR.JUSTICE K.J.THAKER Date : 14/11/2014COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) O/TAXAP/434/2006 JUDGMENT 1.Since, the issue involved in both these appeals is common, they are heard together and disposed of by this common judgment. 2.The appellant-revenue has filed these appeals, challenging the order of the ITAT, Ahmedabad (for short, ‘the Tribunal’), Dated : 12.08.2005, rendered in ITA No. 518/Rjt/2004 for A.Y. 1995-96 and in ITA No. 519/Rjt/2004 for A.Y. 1996-97. 3.The brief facts of the case are that the respondent-assessee filed his return of income for the relevant assessment years. Pursuant thereto, the case of the assessee came to be reopened and it was found that he had made certain interest payments to two companies during both the assessment years. The assessee was, therefore, asked to explain the same. Hence, the assessee filed written submissions, explaining the interest payments made by him during both the assessment years. However, the AO hold that assessee had made no borrowings, and therefore, there cannot be any interest payments and that the assessee had willfully debited huge amounts under the head interest payment to reduce the profit margin. The AO also recorded that the assessee had already sold the shares purchased by him, and therefore, the purchase value being covered by the sale consideration, there cannot be any interest payment to the companies in question. The AO, hence, made certain additions to the income of the assessee and also initiated the penalty proceedings under Section 271 (1)(c) of the Act. Being aggrieved with the same, the assessee approached the CIT(A), which partly allowed the appeal of the assessee. Against the aforesaid order of the CIT(A), the appellant-revenue preferred appeals before the Tribunal, wherein, the Tribunal passed the impugned common order. Hence, the appellant-revenue preferred the present appeals, raising the following question of law for our consideration; “Whether the Appellat Tribunal is right in law and on facts in confirming the order of the CIT(A) deleting the addition of Rs.23,89,500/-/- made u/s.36(1)(iii) by the Assessing Officer on account of interest expenditure?” hence, made certain additions to the income of the assessee and also initiated the penalty proceedings under Section 271 (1)(c) of the Act. Being aggrieved with the same, the assessee approached the CIT(A), which partly allowed the appeal of the assessee. Against the aforesaid order of the CIT(A), the appellant-revenue preferred appeals before the Tribunal, wherein, the Tribunal passed the impugned common order. Hence, the appellant-revenue preferred the present appeals, raising the following question of law for our consideration; “Whether the Appellat Tribunal is right in law and on facts in confirming the order of the CIT(A) deleting the addition of Rs.23,89,500/-/- made u/s.36(1)(iii) by the Assessing Officer on account of interest expenditure?” appellant-revenue, submitted that the CIT(A) as well as the Tribunal failed to appreciate the material on record in its proper perspective and erred in deleting the additions made by the AO under Section 36(1)(iii) of the Act. He submitted that the CIT(A) and the Tribunal ought to have appreciated the fact that there was, in fact, no borrowings by the assessee, and hence, there cannot be any interest payment. He, further, submitted that in view of the fact that the O/TAXAP/434/2006 JUDGMENT assessee had intentionally debited huge amounts towards interest payment with a view to reduce his profit margin, the CIT(A) and the Tribunal committed grave error by passing the impugned order. 6.As against this, Mr. Soparkar, learned Counsel for the respondent-assessee, supported the orders passed by the CIT(A) and the Tribunal and submitted that the appeals being devoid of merit, same be dismissed. In support of his submissions, Mr. Desai placed reliance on a decision of the Apex Court in “Bombay Navigation Co. (P.) Ltd. Vs. Commissioner of Income Tax”, [1965] 56 ITR 52 (SC), wherein, the Apex Court hold that the interest paid could not be allowed as deduction under Section 10(2)(iii) of 1922 Act as interest on borrowed capital and rather it was deductible as business expenditure under Section 10(2)(xv). 7.Heard learned Counsels for the parties and perused the material on record including the orders passed by the CIT(A) and the Tribunal. From the record it appears that the AO disallowed the interest expenditure mainly on the ground that the interest payment was not made in respect of capital borrowed during the course of business. However, from the written submissions made by the respondent-assessee, it clearly transpires that he was under contractual obligation to make payments O/TAXAP/434/2006 JUDGMENT 7.Heard learned Counsels for the parties and perused the material on record including the orders passed by the CIT(A) and the Tribunal. From the record it appears that the AO disallowed the interest expenditure mainly on the ground that the interest payment was not made in respect of capital borrowed during the course of business. However, from the written submissions made by the respondent-assessee, it clearly transpires that he was under contractual obligation to make payments O/TAXAP/434/2006 JUDGMENT to the companies in question and that the same formed part of the costs of purchase of shares. It is well settled position of law that interest paid for the debt incurred or paid as obligation under any agreement is allowable as expenditure. Section 36(iii) of the Act provides that the interest paid on capital borrowed for the purpose of business is allowable under the said section, whereas, Section 37(1) provides that all other kind of interest paid, except under Section 36(iii), are allowable under this section. It is an admitted position that the respondent assessee was dealing in shares and that he had made interest payments to M/s. Arora Corporation and M/s. Rushabh Capital and Finance Ltd.. That is being the position, we are of the opinion that the CIT(A) rightly come to the conclusion that interest expenditure is allowable under Section 37(1) of the Act if the same is not covered by Section 36(1)(iii) and rightly held that the disallowance of interest expenditure to the extent of Rs.23,89,500/- by AO was bad in law and the Tribunal committed no error of law in confirming the order of the CIT(A). 8.In the result, the question is answered in favour of the respondent-assessee and against the appellant-revenue. This appeal stands DISMISSED as being without merit. No order as to costs. UMESH (K.S.JHAVERI, J.) (K.J.THAKER, J)