1. These two cross appeals were filed objecting certain decisions of the ld. CIT (Appeals) in his order dated 30-6-1992. The assessee objected to the disallowance of Rs. 22,742 paid as interest and the revenue objected to the deletion of addition made under Sections 69 & 69A(sic) of the IT Act, 1961 (hereinafter naming of the Act is omitted).
2. The assessee is an individual. He is a Director of M/s Bharat Engineering & Body Building (P.) Ltd. and one of the partners of M/s B.F. Industries. The assessee had paid interest on loans amounting to Rs. 22,742 during the year. The parties to whom the interest was paid were as follows:- 5. V. Dayal Khuntelal Rs. 8,676 ----------- The payment of these interest was claimed as deduction from income earned by the assessee. The Assessing Officer disallowed the claim as according to him the claim does not satisfy the conditions of Section 57(iii). He had given various reasons which can shortly be described as follows:- He pointed out that the copy of accounts filed it was found that the amount of loan from parties mentioned at Sl. Nos. 1, 4 & 5 had deposited in the loan account of the assessee with Bharat Engineering and Body Building Private Ltd. (BEBCO for short) of which the assessee is one of the directors. The total credit balance available in the books of BEBCO as on 31-8-1989 was Rs. 2,89,314 out of which shares were allotted for Rs. 1,20,000 and the balance of Rs. 1,62,314 was carried forward as loan. In his view the advance made to BEBCO initially was not for purpose of purchasing the shares because had it been so the assessee would not have been treated as creditor in the books of M/s BEBCO and amount should be accounted as share capital a/c. He also observed that the loan taken from V.K. Saraf and Navin Kumar Agarwal (Sl. Nos. 2 & 3) was for the purpose of advancing to the firm (see page 4 of the assessment order) in which the assessee is a partner, hence the interest payable is not allowable under Section 57(iii). In his order, he referred to the various decisions. He pointed out that in the case of CIT v. Rqjendra Prasad Moody [1978] 115 ITR 519 (SC) it was held that the purpose of expenditure must be to make or earn income. Here in this case, the loan was taken by the assessee to advance to a company where the assessee is a Director and he knew that no interest would be earned on it. He pointed out that this view was accepted in most of the High Courts. Some of them are Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All.), Memraj Manmal Ruia v. CIT [1972] 84 ITR (Bom.) (sic) and he specially pointed out that in the case of Smt. Viramati Ramkrishna v. CIT [1981] 131 ITR 659 (Guj.)(App.). His Lordships Mr.
Justice Desai after considering all the judicial pronouncements on the subject laid down very clear and ambiguous conditions for allowability of expenditure incurred under Section 57(iii) of the Act. His Lordships opined- The purpose of making or earning such income should be the sole purpose for which the expenditure must have been incurred that is to say, the expenditure should not have been incurred for such purpose as also for another purpose or for a mixed purpose.
After quoting the above observation, the Assessing Officer opined that even if it is presumed that the purpose was not only to advance money without interest but also to buy shares then also the purpose becomes a mixed purpose and as explained by justice Desai deduction under Section 57(iii) is not available. He thereafter held that according to him, the purpose was only to advance without interest and even if it is converted to shares the assessee is not entitled to deduction under Section 57(iii) (holding it as mixed purpose). In respect of advance made to the firm, in which the assessee is a partner, he decided that no deduction under Section 57(iii) can be allowed. Against this order the assessee filed an appeal before the ld. CIT (Appeals).
3. Before the ld. CIT (Appeals), the ld. counsel for the assessee submitted that the loans from M/s B.K. Saraf, V. Dayal Khuntelal and Navin Kumar Agrawal were invested in Bharat Foam Industries in which the assessee is a partner. He pointed out that the Assessing Officer's mistake had considered only two loans i.e., from V.K. Saraf and Navin Kumar invested in the said firm (Page 4 of the assessment order). He filed a copy of bank account with the ld. CIT (Appeals) which showed that the loans received from Shri V. Dayal Khuntelal was also invested in the firm. It was, therefore, argued that Rs. 19,642 paid as interest should be allowed under Section 36(1)(iii). It was argued that by mistake the Assessing Officer had considered the entire claim under Section 57(iii) and disallowed the same. For the remaining part of the interest which was paid to Krishna Kumar Agrawal and Nitish Kumar Agrawal was for loans of Rs. 1,65,500. This was invested in M/s BEBCO.Out of this Rs. 1,20,000 was adjusted against the cost of shares and the balance remained with M/s BEBCO. It was argued that the Assessing Officer misconceived himself about the entries made in the account. It was pointed out that unless the amount was converted to shares no entry as share capital account can be made. It was also argued that the Assessing Officer wrongly applied the decision of the Supreme Court in Rqjendra Prasad Moody's case [supra). It was submitted that there was no mixed purpose for obtaining the loan. If the entire amount has not been invested or converted into shares because of the decisions of the Board's Meeting it cannot be said that the advances were for mixed purposes. As to the remark of the Assessing Officer the purposes of the assessee was to make funds available to the assessee and not to earn income the ld. counsel said that the facts remained that 'purpose' and 'motive' are two different concepts. The purpose was only to earn income and the motive may be quite different. It was argued that in several judicial pronouncements it has been observed that to get the deduction under Section 57(iii) of the Act one must not confuse with the purpose and motives and the motive is quite irrelevant in the parlance of the deduction under Section 57(iii). The ld. counsel relied on several decisions. Some of them are Ormerods (India) (P.) Ltd. v.CIT [1959] 36 ITR 329 (Bom.) and CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267, 273 (Guj.).
4. The ld. CIT (Appeals) very briefly disposed of the appeal and decided against the assessee. I quote his relevant portion of the order:- I have considered the reasons given by the Assessing Officer in his assessment order as well as case law cited by him. I have also given due consideration to the arguments forwarded by the AR of the appellant. I am of the view that the case of the appellant is fully covered by Section 57(iii) of the IT Act. Therefore, the disallowance is upheld and grounds taken in this regard are rejected.
The ld. Counsel for the assessee argued that the above order of the CIT (Appeals) cannot be accepted. No reasons whatsoever had been projected by him in his order, to support the order of the Assessing Officer and reject the submission of the assessee. He argued that the entire claim of the assessee should be considered In the correct perspective and deduction should be allowed.
The ld. DR, on the other hand, submitted that the reasons given by the Assessing Officer were proper and his order was rightly confirmed by the ld. CIT (Appeals). As the reasons given by the Assessing Officer were exhaustive the ld. CIT (Appeals) did not repeat the reasons in support of the order of the Assessing Officer.
5. I have considered the rival submissions, facts and the materials on record. I have gone through the accounts. I am convinced that apart from the loan taken from B.K. Saraf and Navin Kumar Agrawal, the loan taken from Shri V. Dayal Khuntelal was also invested in the firm where the assessee was a partner. Though the claim of the assessee under Section 36(1)(iii) or 57(iii) cannot be accepted, the interest to obtain the loan for advancement to the firm is allowable under Section 67. The Assessing Officer though had accepted that the loans from V.K.Saraf and Navin Kumar Agrawal was invested in the firm, he had wrongly considered the claim under Section 57(iii) and disallowed the claim. He should have considered the claim under Section 67 of the Act which is the appropriate section. In the case of CIT v. Raja Vikramaditya Singh [1987] 32 Taxman 475 (MP) Their Lordships of the Madhya Pradesh High Court have held that even when firm has not carried on any business activity during that period the assessee partner can claim deduction of interest paid on the amount borrowed by him for investment in the firm.
The reason for citing this case is that from the assessment order it is not found that whether the firm for which this interest is claimed carried on any business or not. In case, the firm has carried on business there cannot be any dispute in giving deduction i.e., in either case deduction is allowable. I, therefore, direct the Assessing Officer to deduct Rs. 19,642 under Section 67. For the remaining interest also my view is that the same should also be allowed. No materials have been brought on record to show that there is any attempt of tax avoidance by introducing the loan in the books of the company through the assessee either by the assessee or by the company. If the company needed money it could have directly obtained the loan and claimed interest. There was no need of Director assessee to obtain loan on interest to advance the same to the company. From the Director's Meeting it is evident that large no. of shares were not issued. As a Director of a Company therefore, it cannot be denied that he had knowledge that unissued shares will be issued in future. It is, therefore, not usual for the director assessee to obtain the loan and deposit the same in the company waiting for issue of shares. Interest payable on them is not very large. In these circumstances the submission of the assessee that the money was kept with the company to purchase unissued shares when it is issued, is acceptable and believable. As the company had issued shares after the money has been received from the assessee, the share capital cannot be credited as suggested by the Assessing Officer. I find no defect in accounting. I am, therefore, of the view that the remaining interest also should be allowed.
6. In the revenue's appeal deletion made under Sections 69 & 69A (sic) is objected to. The Assessing Officer observed that the assessee had declared income of Rs. 15,430 as income from other sources. On being asked about the nature and sources of such income, the assessee's representative expressed his inability in furnishing the same. The Assessing Officer, therefore, considered the same as income from undisclosed sources assessed under Sections 69 and 69A. When the matter was carried on in appeal to the ld. CIT (Appeals), he was of the opinion that as the assessee had already shown the income as also the source, the same cannot be added as unexplained investment and unexplained cash under Sections 69 & 69A. He deleted Rs. 15,430.
7. The ld. DR argued that when the assessee could not explain the nature and sources of the income, the Assessing Officer was justified in treating the income as unexplained investment and unexplained cash under Sections 69 and 68 of the Act. He pointed out that this amount was invested by the assessee and partly available in cash. In view of this matter, he argued that the order of the Assessing Officer should be confirmed. The ld. counsel argued that when the income has been declared as income from other sources, the same cannot be treated as unexplained investment and unexplained cash under Sections 69 and 69A.8. I have considered the rival submissions, facts and the materials on record. At the outset I may say that the CIT (Appeals) was not justified in deleting Rs. 15,430 from the computation of income. It can be seen that the income was declared by the assessee and it is not disputed that this was offered for taxation. The deletion of Rs. 15,430 is, therefore, reversed. Whether this income is unexplained investment or unexplained cash is only academic. The income was declared as taxable and taxed as such. I, therefore, confirm the order of the Assessing Officer and reversed the order of the ld. CIT (Appeals).
9. In the result the assessee's appeal and the revenue's appeals are dismissed.