Pramod Chand Mahnot , Jaipur vs Department Of Income Tax
- CitationITA No. 1135/JP/2011
Ratio decidendi
The rule this decision rests on
The Tribunal's reasoning rests on the following principles, stated in the order the court takes them. Where an assessee borrows funds at a rate of interest and advances them to a company at a lower rate of interest, and the assessee is himself offering the interest income so received to tax, the interest paid on the borrowings is an expenditure incurred for earning that income and is allowable as a deduction under the head "income from other sources", notwithstanding that the assessee earns a lower rate of return on the advance than he pays on the borrowing. The choice of the rate at which an assessee lends money to a company in which he is a substantial stakeholder, reflecting the company's financial position and the statutory ceiling on interest payable by such companies, is a business decision of the assessee which the Revenue cannot question or direct; the loss arising from a difference in rates, where both the assessee and the company are taxable at the highest rate, does not amount to a loss of revenue warranting disallowance.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM
vk;dj vihy la-@ITA No. 1135/JP/2011 fu/kZkj.k o"kZ@Assessment Year : 2007-08
The A.C.I.T. cuke Shri Pramod Chand Mahnot Circle-3, Jaipur. Vs. C-345, Hans Marg, Malviya Nagar, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAPPM 5898 M vihykFkhZ@Appellant izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by : Shri Ajay Malik. fu/kZkfjrh dh vksj ls@ Assessee by : Shri G.G. Mundra
lquokbZ dh rkjh[k@ Date of Hearing : 01/12/2014 ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 13/02/2015
vkns'k@ ORDER
PER: R.P. TOLANI, J.M.
This is an appeal filed by the revenue against the order dated
07/10/2011 by the learned CIT(A)-I, Jaipur for A.Y. 2007-08. The sole
ground of appeal is as under:-
"Whether on the facts and in the circumstances of the case and in law the learned CIT(A) is justified in deleting the disallowance
2 ITA 1135/JP/2011_ ACIT Vs. Shri Pramod Chand Mahnot
of Rs. 9,37,816/- made by the A.O. on account of interest etc. paid by the assessee on amount taken on loan and forwarded to M/s JVS Foods P. Ltd. where he is a Director."
2. The learned D.R. relied on the order of the Assessing Officer.
3. Learned counsel for the assessee contends that the assessee is
an individual deriving income from salary, house property, income from
other sources i.e. interest. During the course of assessment
proceedings, the Assessing Officer without considering the interest
income of the assessee, disallowed the above amount of interest paid
by the assessee on borrowings raised by him for advancing them to the
companies M/s JVS Foods Pvt. Ltd and Flora O Foods.
3.1 The assessee is promoter of JVS Foods Pvt. Ltd. and his daughter
is promoter of Flora O Foods. As per Company Law, the companies are
debarred from paying interest exceeding 12.5% per annum. In order to
help the companies promoted by them in raising funds assessee raised
the funds from market @ 12.5% and advanced to companies @ 12%.
The learned CIT(A) after considering the facts and circumstances,
deleted the addition by following observations:
"I have carefully perused the order of the A.O. and the submissions of the AR. The order of the A.O. is a very cryptic and does not controvert similar submissions made by the 3 ITA 1135/JP/2011_ ACIT Vs. Shri Pramod Chand Mahnot
assessee during the course of assessment proceedings. It is a fact that the assessee is a promoter and director in the company M/s JVS Foods Pvt. Ltd. He accepted the loans from various parties and bank at market rate and paid brokerage and bank charges because the company was debarred from taking loan from general public by Company law. These funds were in turn advanced to the company from whom the assessee received interest @ 12%. At best what can be disallowed is the difference in rate of interest paid by the assessee and that received by him from the company in which he was a major stake holder. As per section 3 of Acceptance of Deposits Rules of Company, it has been laid down "that no company shall invest or accept or renew any deposit in any form at a rate of interest exceeding 12.5% per annum."
From the perusal of the order it reveals that the company paid interest @ 12% to the assessee. It was submitted that the company paid 12% rate of interest instead 12.5% due to poor financial conditions. It is a settled legal position that the Department cannot direct the assessee on how to run his business or how to take business decisions. It was the business decision of the assessee to advance loan to the company @ 12% rather than 12.5% which has at best resulted in a loss of Rs. 31,297/- in his hands. It was the business decision of the appellant to incur the loss of Rs. 31,297/- in his individual capacity than in the hands of the company. The department cannot question this decision as both the entities are taxable.
4 ITA 1135/JP/2011_ ACIT Vs. Shri Pramod Chand Mahnot
Given the above facts and law, the impugned addition of Rs. 9,37,816/- is directed to be deleted."
4. Learned counsel for the assessee relied on Section 56(2), which
stipulates that the expenditure incurred by the assessee for earning the
income from other sources i.e. interest is an allowable deduction. Since
for earning the interest from these companies, the assessee borrowed
the funds from market, the interest paid in this behalf is an allowable
expenditure.
5. We have heard the rival contentions of both the parties and
perused the material available on the record. As the facts emerge, the
learned Assessing Officer failed to appreciate that the assessee was
offering the interest income albeit @ 12%. Due to some legal
restrictions on the borrowings by the companies this course was
adopted raising funds @ 12.5% interest and advancing to companies at
12%, the difference was meagre Rs. 31,297/-. The learned CIT(A) held
that it was a prudent business decision as the better financial health of
promoted companies would have benefitted the assessee as well. Both
the entities are taxable at the highest rate. Consequently, there is no 5 ITA 1135/JP/2011_ ACIT Vs. Shri Pramod Chand Mahnot
lost revenue. We see no infirmity in the order of the learned CIT(A),
which is upheld.
6. In the result, revenue's appeal is dismissed.
Order pronounced in the open court on 13/02/2015.
Sd/- Sd/- ¼Vh-vkj-ehuk½ ¼vkj-ih-rksykuh½ (T.R. Meena) (R.P.Tolani) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member
Tk;iqj@Jaipur fnukad@Dated:- 13th February, 2015
*Ranjan
vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- The ACIT, Circle-3, Jaipur.
2. izR;FkhZ@ The Respondent-Shri Pramod Chand Mahnot, Jaipur.
3. vk;dj vk;qDr¼vihy½@The CIT(A)-I, Jaipur.
4. vk;dj vk;qDr@ CIT, Jaipur
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 1135/JP/2011)
vkns'kkuqlkj@ By order,
lgk;d iathdkj@Asst. Registrar
This page reproduces a public judgment and a summary of it. It is research material, not legal advice, and it is no substitute for advice from an advocate on your own facts.
Research this judgment with Miss Lucy
Ask what it holds, what has followed it, and what it means for your matter — in plain English, with the citations.
Try Miss Lucy free