ANJANA VINAYAK,YAMUNANAGAR vs. ITO, W-1, YAMUNANAGAR

आदेश/Order

PER N.K. SAINI, VICE PRESIDENT This is an appeal by the Assessee against the order of the Ld. CIT(A)-4, Ludhiana dt. 18/01/2019.

1. The order of CIT(A) is bad in Law.

4. The CIT(A) erred is not noticing that the Hon'ble Supreme Court in the case V.P. Gopinathan confirmed the decision merely on the fact that the argument of the Assessee of real income was not accepted , whereas there is no such argument in the case Anjani Vinayak.

5. The CIT(A) erred is not considering the expression "wholly and exclusively" and that does not mean necessarily. 6. The CIT(A) erred in not noticing the finding of the ITAT Agra in the case of Raj Kumari Agarwal wherein it was held an such expenditure is an expenditure incurred wholly and exclusively for earning from interest on fixed deposits, whereas there is no such discussion in the case of Dr. V.P. Gopinathan 248 ITR 449 7. The above grounds are without prejudice to each other. 8. The appellant craves leave to add, modify and withdraw any other grounds of appeal before or during the appellate proceedings.

From the aforesaid grounds it would be clear that the only grievance of the assessee relates to the confirmation of disallowance of claim for deduction under section 57(iii) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).

"With regard to point No. 2. In continuation of Deduction of Rs. 2893281/-claimed on account of interest paid on loan raised against FDR to bank u/s 57, as required by your goodself copy of account of loan statement from bank is being enclosed for your kind verification:-

With reference to expenses claimed against FDR intt. I had claimed Rs. 2893281/-under section 57(iii) of the Act. 1961 towards loan raised from the same bank against security of fixed deposit.

There is no dispute that interest income in this case is to be taxed as an 'Income from other sources' For your kind reference section 57(iii) of the Act is reproduced here as "Section 57(iii) of the act clearly provides that " the income chargeable under 'Income from other sources' shall be computed after making the .... Deduction namely (interalia)..any ..expended wholly and exclusively for the purpose of making or earning such income.

The question here is that we really need to adjudicate on whether or not interest paid on the loan against the fixed deposit can be said to have been incurred "wholly and exclusively "for the purpose of earning of interest income from fixed deposits.

The legal connotations of expressions "wholly and exclusively" came up for consideration before a coordinate bench of this Tribunal, though in the context of deductions from business income, and the coordinate bench, extensively reproducing from binding judicial precedents, observed as follows in the case of A/ay Singh Deal Vs. [JCIT (91 ITD 196) 2004] : …..

It is thus clear that as long as the expense is incurred wholly and exclusively for the purpose of earning an income, even if it is not necessarily for earning that income, it will still be deductible in computation of income. What thus logically follows is that even in a situation in which proximate or immediate cause of an expenditure was an event unconnected to earning of the income in the sense that the expenditure was not triggered by the objective to earn that income, but the expenditure was, nonetheless, wholly and exclusively to earn or protect that income, it will not cease to be deductible in nature. It is also important to bear in mind the fact that a borrowing against fixed deposit cannot be considered in isolation of a fixed deposit itself inasmuch as going by the admitted facts of this case, the interest chargeable on the fixed deposit itself is linked to the interest accruing and arising from the fixed deposit. On these facts, in order to protect the interest earnings from fixed deposits and to meet her financial needs, when an assessee raises a loan against the fixed deposits, so as to keep the source of earning intact, the expenditure so incurred in wholly and exclusively to earn the fixed deposit interest income.

The assessee could have gone for premature encashment of bank deposits, and thus ended the source of income itself as well, but instead of doing so, she resorted to borrowings against the fixed deposit and thus preserved the source of earning. The expenditure so incurred, is an expenditure incurred wholly and exclusively for earning from interest on fixed deposits. We are alive to the fact that in the case of a business assessee, and in a situation in which the borrowings against fixed deposits were resorted to for use in business, consideration for end use of funds so borrowed would be relevant because the interest deduction is claimed as a business deduction under section 36(l)(iii). That aspect of the matter, however, is academic in the present context as the limited issue for our consideration is whether or not, on the facts before us, the interest on borrowing against the fixed deposits could be said or protect the interest income from fixed deposit interest and thus, incurred wholly and exclusively for the purposes of earning such income."

3.1 The A.O. again asked the assessee to explain as under:

You have claimed deduction of R.s. 28,93,281/- as expenses against interest earned of bank FDRs. As per order sheet entry dated 22.08.2016, it was requested to explain the purpose of availing the overdraft facility from the bank and how the loan funds have been utilized by you. Further, it was requested to justify that the expenditure of interest has been incurred wholly and exclusively for the purpose of making or earning such income as prescribed u/s 57 (iii) of the IT Act, 1961. The proceedings were fixed on hearing on 26.08.2016 but no reply has been filed, today. Please explain.

3.2 In response the assessee stated as under:

I had given money to my son to avoid premature encashment of the fixed deposits, for that purpose which would have resulted in net loss to me, I took loan against fixed deposit so as to keep the fixed deposit intact and earn the interest income thereon. As if I had premature FDR instead of taking loan, my income would be less as compared to at present. Same was held in case of Raj Kumari Aggarwal Vs DCIT, Circle Agra ITANo. 176/Agra/2013 Ay 2008-09 dated 19.07.2014.

The assessee has relied upon the following judgments:

Ajay Singh Deol Vs. [JCIT (91 ITD 196] 2004 Raj Kumari Aggarwal Vs DCIT, Circle Agra”

3.3 The A.O., however, was not satisfied from the explanation of the assessee and made the addition of Rs. 28,93,281/- by observing in para 3.3 of the assessment order dt. 28/11/2016 as under:

3.3 From the facts discussed above, it is apparent that the assessee has failed to justify that the said expenditure of interest has been incurred wholly and exclusively for the purpose of making or earning such income as prescribed u/s 57(iii) of the IT Act, 1961. Interest paid on loans raised against FDRs for giving the money to son cannot be said to be an expenditure incurred wholly and exclusively for the purpose of making or earning such income as prescribed u/s 57(iii) of the IT Act, 1961. Hence, the explanation filed by the assessee with regard to deduction of Rs. 28,93,281/- claimed u/s 57 (iii) of the I.T. Act, 1961 out of interest income declared at Rs. 45,49,341/- is hereby rejected. Accordingly, an addition of Rs. 28,93,281/- is made to the income of the assessee under the head income from other sources.

“ In this regard it is submitted that assesse filed return declaring income of Rs. 1320390/-. Assessee’s only source of income is interest from bank FDRs, Interest on saving bank account or interest on securities. Assessee has invested in fixed deposits receipts in bank in earlier years and is earning interest thereon as below:

Interest received quarterly during Date of purchase of FDR Rate of interest at which invested the financial year 2013-14 Renewal of old FDR valuing Rs. @ 9.15% P.A Rs 4549341.00 44250000/- Assessee raised loans against the following FDR’s and paid interest on the same to bank as indicated each such loan:

Particular Amount of loan raised Rate of interest Interest paid during the against the FDR year Loan A/c No. Opening Balance @ 10.15 Rs. 1994713/- 358607030106673 180.89 lacs Loan A/c No. Opening Balance 52.30 Rs. 898568 358607030106712 lacs @ 10.15 Addition received during 50.25 lacs the year 2013-14

102.55 lacs

2893281.00 As per policy of the bank, if FDR with bank are encashed Pre Maturity, then there is penalty of 1.5% by the bank.

The Assessee got loan against the security of FDR Rs. 102.55 lacs @ 10.15% i.e; 1% higher. The Interest receivable on FDR i.e; 9.15%. Had the Assessee got FDR Pre matured, then she will lose ½% more and it works out total Rs. 51275/-.

Your honour will appreciate that the Assessee has got more Income on account of Interest on FDR during the year, even after making payment of interest on loan received against security of these FDR.

Thus during the year assessee received interest of Rs. 45,49,341/- against the FDR and paid a sum of Rs. 28,93,281/- in respect of loans raised against the FDR’s Assessee claimed the above referred amount of Rs. 28,93,291/- as deduction against the interest received as deduction under section 27 of IT Act. However the learned assessing officer has disallowed the claim of the assessee and made addition of Rs. 28,93,281/- to the income of the assessee. Aggrieved the said addition, assessee has filed an appeal before your goodself.

Assessee has raised the following grounds of appeal:

1. The learned assessing officer has wrongly applied the provisions of section 57(iii) of IT Act.

2. The learned assessing officer had not appreciated the intention of the assessee, if she had premature FDR instead of taking loan, her net income would be on the lower side as had been declared by her in the return as duly explained during the course of assessment but the learned A.O. had not accepted the contention of the assessee.

3. The learned assessing officer has failed to understand the facts and circumstances of the assessee.

4. The appellant may be allowed to add/alter or modify any of the grounds of appeal at the time of hearing.

Ground no. 1 to 3 raised by the assessee are in respect of disallowance of interest of Rs. 28,93,281. Assessee has been receiving interest on various FDR and the same was being credited to the saving bank account of the assessee. Assessee has raised two loans of Rs. 180 Lacs and of Rs. 102 Lacs against security of the FDR’s of the assessee as these funds were required for the need of the family, for the purposes of business being handled by her sons.

It may be seen that assessee has interest earning apparatus in the shape of FDR’s in the bank on which she was receiving interest @ 9.15% Per annum and interest on each of the FDR’s was being credited to the saving bank account of the assessee. Assessee claimed deduction of the interest paid under section 57(iii) of IT Act.

Assessing officer however relied on the judgment in the case of CIT Vs. VP Gopinathan 248 ITR 449. However the ratio laid down in that case is not applicable as in that case, assessee before the Tribunal had made it clear that the assessee’s case did not rest upon the provisions of Section 57(iii) of the Act. In other words, it was not the contention of the assessee, that he was paying interest to the bank to facilitate the earning of interest from the bank.

The argument before the honorable Supreme Court was on behalf of the assessee was that the real income of the assessee is only Rs. 27,034. The Honorable Supreme Court in that situation held that it could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit by him in the bank.

The relevant paras of CIt Vs. V.P. Gopinathan 248 ITR 449 are reproduced as under:

“ 4. Learned counsel appearing for the assessee before the Tribunal had made it clear that the assessee’s case did not rest upon the provisions of Section 57(iii) of the Act. In other words, it was not the contention of the assessee, very rightly, that he was paying interest to the bank to facilitate the earning of interest from the bank.

The case was decided based on arguments taken by the assessee before ITAT.

The case of the assessee is squarely covered on the fact situation in the case of Raj Kumari of ITAT AGRA who has discussed in detail the similar facts (such situation and facts not existing in VP GOPINATHAN CASE of Hon'ble Supreme Court.

FACTS AND SITUATION EXPLAINED AS UNDER For the purposes of requirement of funds, which were assessee’s own funds and were lying with the bank in the shape of FDR assessee had the following options:

Option 1: assessee could have prematurely en-cashed the FDR and in that case she was required to pay back the interest in the shape of penalty for premature closing of FDR’s.

Option2: Assessee could have raised loans against the FDR’s and paid interest on the loan raised against.

In the first case the income earning apparatus would have ceased to exit at the time of premature closing of FDR and assessee would not have earned any income on such closed FDR. Further assessee was also liable to pay bank the penal charges for premature closing the FDR.

In the second option assessee raised loans against security of her own FDR so as to save her income earning apparatus but had to pay interest on the demand loan.

Assessee chose the second option so as to save her income earning apparatus and claim the interest paid against the interest earned on FDR’s as deduction under section 57(iii) of ITA Act.

Section 57 of the IT Act reads as under:

Section 57:

Deductions:- The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely:

(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income:

Thus for claiming deduction under section 57(iii) it has to be proved that the expenses have been laid out or expended wholly and exclusively for the purpose of making or earning such income.

There is no dispute that interest income in this case is to be taxed as an ‘income from other sources.’ Section 57(iii) of the Act clearly provides that “the income chargeable under the head ‘income from other sources’ is to be computed making the ………….deduction, namely..(inter alia)…any…expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exlusively for the purpose of making or earning such income”. It is thus clear that as long as expenditure is incurred wholly or exclusively for the purpose earning an income, such, expenditure constitutes an admissible deduction in computation of the income.

Reference was made to the case of Raj Kumar Agarwal ITAT AGRA dated 18-07-14(copy enclosed)

As can be seen above the case of the assessee falls within the ratio of the judgment of ITAT Agra Bench in the case of Raj Kumari Aggarwal Vs. DCIT Circle 2 Agra in where the facts of the case of assessee are identical.

The decision of Hon'ble Supreme Court is distinguishable in view of the fact that factual situation is different as the issue of necessity of loan and the loss arising due premature encashment of FDR was not before the Supreme Court. The ITAT AGRA has also relied upon the SC DECISIONS.

Keeping in view the above explained position, it is respectfully prayed that assessee may be allowed deduction as claimed in the return of income at Rs. 28,93,281/-.

5. Ld. CIT(A) after considering the submissions of the assessee observed that the assessee earned interest income on FDR amounting to Rs. 45,49,341/-and raised the loan against the security of FDR and paid interest of Rs. 28,93,281/-. He further observed that the interest expenditure was incurred for providing loan to the family members therefore the disallowance of interest made by the A.O. on account of loan raised against security of FDR was to be upheld. Accordingly the addition made by the A.O. was sustained

6. Now the assessee is in appeal.

• Raj Kumar Agarwal Vs. DCIT, Circle-2, Agra in order dt. 18/07/2014 • Knitwell India Pvt. Ltd. Vs. DCIT, Circle-1(1), Chandigarh in ITA No. 1174/Chd/2017 order dt. 06/02/2019 • CIT Vs. U.K. Bose in ITA No. 258/2010 (Del HC) order dt. 30/11/2012 • CIT Vs. J.B. Royd in ITA No. 546/2010 (Del HC) order dt. 30/11/2012 8. The Ld. Counsel for the assessee submitted that the Ld. CIT(A) had given the findings without considering the reply of the assessee which shows that the Ld. CIT(A) has prejudged the issue. It was contended that the Ld. CIT(A)referred the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Dr. V.P. Gopinathan reported at 248 ITR 449 which was relied by the A.O. however the said judgment was distinguishable on facts because in the said case there was no issue relating to the disallowance under section 57(iii) of the Act. It was further submitted that in the said case which was relied by the A.O. and considered by the Ld. CIT(A) the loan was taken by the assessee from another bank and interest was paid on the said loan and the interest earned on FDR was from different bank while in the case of assessee the loan was raised against the FDR to save the interest and not to pay the penalty.