If certain investments have not earned exempt income, no disallowance of expenditure having nexus with such investments can be done

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If certain investments have not earned exempt income, no disallowance of expenditure having nexus with such investments can be done

Ravi Mohan Gehi Vs DCIT

ITA No. 6238/Mum/2016

Short overview of the case:

AO observed that assessee has claimed interest expenses against the interest income received from various parties under section 57(iii) of the Act. AO observed that assessee has not proved the interest expenditure is laid out or expended wholly or exclusively for the purpose of making or earning interest income, there is no connection with or relation to the interest income earned and the expenditure claimed are not as per section 57 (iii) of the Act. In the instant case assessee has failed to fulfill the conditions that interest expenditure incurred by him for the purpose of earning the interest income. Accordingly he disallowed the interest expenditure. AO observed that the assessee has shown an amount as dividend income and claimed the same as exempt. The assessee has not shown any expenditure incurred for earning the exempt income. AO invoked the provisions of section 14A read with rule 8D (2) (iii). During the course of search in the case of Bliss GVS Pharmaceutical Group, certain loose papers pertaining to M/s Growmore Investment and Developers Private Limited were found and seized being copies of undated Hundies of Rs. 25 lakhs each which were signed by the assessee, director of M/s Growmore Investment and Developers Private Limited and who was also a co-owner of the property at Hyde Park from whom Bliss GVS Pharma Ltd (BGVSPL) had purchased the office premises as per agreement. During the course of search, Mr. S. N. Kamath of BGVSPL was confronted on these documents, he stated that they have paid cash of Rs. 1.5 crore to GIDPL and offered the same as additional income for financial year 2010-11. AO observed that the amount of Rs. 1.5 crore is taxable in the hands of assessee and Smt Priya, owner of the property as unaccounted cash consideration received for sale of property. Accordingly, 50% of the amount was added to the total income of the assessee, being 50% shareholder as unaccounted cash consideration. CIT(A) sustained the additions made by the AO for the disallowance of interest expenditure, 14A disallowance and undisclosed sales consideration.

On appeal, the Tribunal held that,

Whether if certain investments have not earned exempt income, disallowance of expenditure having nexus with such investments is to be deleted – YES: ITAT

 the assessee has received an offer for lending to a property developer. On the basis of bank statement submitted by the assessee, it is noticed that assessee has in fact made arrangement for an amount from internal source and also taken loan from other parties @ 9%. There is evidence that assessee has actually paid to M/s Supreme Mega Constructions LLP and there is evidence in the bank statement that assessee has borrowed funds from the parties i.e., M/s Khoobsurat and M/s Satellite Developers Ltd. The transaction with M/s Supreme Mega was not materialized due to the fact that the developer wanted one time payment and not in instalments. No doubt the interest expenditure incurred by the assessee has no link to the interest income earned by the assessee. However assessee is regularly into arranging funds for the lending business. Since as a continuous venture in earning the interest income, it is not necessary that all the expenditure like interest has to have direct link to earning of interest income. Assessee has sufficient capital to make investment as well as lending the funds to earn interest income. The object of the venture is relevant and the object of the assessee is to earn the interest income by arranging funds internally as well as arranging from outside. It is not necessary that you can earn in every transaction and in this case, instead of making interest income, assessee has incurred a loss. Only income is not chargeable to tax under the head income from other sources and but loss is also chargeable under the head income from other sources. Interest expenditure incurred by the assessee will fall under the category of loss. Therefore, it is allowed as an expenditure;

the AO has considered average value of investment and applied the rule. It is not known whether the assessee has earned the exempt income from all the investments made by the assessee. As per the judicial precedents, the AO should have considered only those investments which has earned exempt income and eliminate those investment which has not earned exempt income. AO should calculate the disallowance under rule 8D (2) (iii) by eliminating the investments which has not earned the exempt income. By calculating the disallowance as per above direction and AO should compare the disallowances by simultaneously calculating 31% of the administration expenditure and the revised disallowance under rule 8D (2) (iii). In case the revised disallowance under rule 8D(2) is less than 31% of the administration expenditure then AO should disallow as per rule 8D(2). Matter is remanded back in this regard;

 as such there is no clear finding that the cash was actually received by the assessee except that finance manager has confirmed in writing on the back side of the hundies. Other than that there is no other proof linking the assessee to have received the cash from Bliss GVS, moreover in this case, it was found that employee of the Bliss GVS has received the cash. From the hundi transaction and the contents of the hundi, clearly indicate that this transaction was between Growmore Investment and Bliss GVS. Any proceedings has to be taken with these companies and just because there is property transaction by the assessee, the revenue cannot presume itself linking assessee as the beneficiary of the transaction. There is no benefit to Bliss GVS in the concerned transactions and neither to Growmore Investment. Whatever Bliss GVS has paid in cash presumably to the assessee, was received back. AO has linked hundi transaction between Growmore Investment and Bliss GVS with assessee. There is no proof coming out of the documents found during search linking the assessee as the beneficiary except presumption and assumptions of the tax authorities. Since there is no cogent material in the possession of the Revenue to indicate that the assessee has actually received cash from Bliss GVS, the addition made by AO is deleted.

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