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Facts
The assessee earned interest income from fixed deposits and took a loan against these FDs, paying more interest on the loan than earned on the FDs. The assessee claimed the interest expense as deductible, but the AO added back the interest income. The CIT(A) upheld the AO's decision.
Held
The Tribunal held that if an expenditure is incurred wholly and exclusively to earn or protect income, it is deductible, even if the immediate cause is unrelated. However, due to lack of clarity on the nexus between interest income and overdraft expenses, and the purpose of the overdraft facility, the case was remanded.
Key Issues
Whether interest paid on an overdraft taken against fixed deposits, where the interest paid exceeds the interest earned, is an allowable deduction for the purpose of earning interest income, or if it was for personal financial needs.
Sections Cited
147, 148, 250, 57(iii), 36(1)(iii)
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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY
O R D E R
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Assessee against the order dated 28.03.2025, impugned herein, passed by the Ld. Commissioner of Income Tax (Appeals) ADDL/JCIT(A) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2013-14.
In this case, the assessee being an individual and director in M/s. Silver Global Services Pvt. Ltd. had earned interest income of Rs.6,48,842/- from fixed deposits with Model Co-operative Bank Ltd. and in order to avoid premature encashment of FD had taken loan against such FD from Model Co-operative Bank Ltd. and paid interest to the said bank to the tune of Rs.8,39,626/- and since the interest paid was more than the interest received, therefore, has not shown such interest earned.
Ms. Stella D Souza 3. Thus, Assessing Officer (AO) reopened the case of Assessee u/s 147 of the Act by issuing notice u/s 148 of the Act dated 20.10.2025 and asked to explain “as to why the interest income of Rs.8,25,151/- should not be added in the total income of the assessee”.
The assessee before the AO claimed that because the assessee has paid more interest to the bank, then the interest received and therefore had shown income as “NIL”. Further, since there were overdraft interest expenses for making investment in company, in which she is a director, hence the interest income was not shown.
The AO though considered the aforesaid claim of the Assessee, however, not being satisfied with the same, ultimately held that the Assessee has not established the nexus of interest income and overdraft interest expenses. Thus, the Assessee is not eligible to claim expenses from interest income earned from FD and hence the interest income of Rs.6,48,842/- received by her during the year is added to the total income of the Assessee. The AO consequently made the addition of Rs.6,48,842/- being undisclosed interest income and added in the income of the Assessee.
The Assessee, being aggrieved, challenged the said addition by filing first appeal before the Ld. Commissioner and mainly focused that Hon'ble Co-ordinate Bench of the Tribunal in the case of Raj Kumari Agarwal Vs. DCIT 9ITA No.176/Agr/2013 decided on 18.07.2014 has dealt with identical issue and ultimately allowed the identical expenditure incurred by observing and holding as under:
“18. 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 Ms. Stella D Souza 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 authorities below were apparently swayed by the fact that the borrowings were triggered by assessee’s financial needs for personal purposes and, by that logic, the borrowing cannot be said to be wholly and exclusively for the purposes of earning interest income, but what this approach overlooks is whether the expenditure is incurred for directly contributing to the beginning of or triggering the source of income or whether the expenditure is for protecting, and thus keeping alive, that source of income, in either case it is expenditure incurred wholly and exclusively for the purpose of earning that income. The assessee indeed required that money, so raised by borrowing against the fixed deposits, for her personal purposes but that’s not relevant for the present purposes. 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, in our considered view, 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(1)(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 borrowings against the fixed deposits could be said to protect the interest income from fixed deposit interest and thus, incurred wholly and exclusively for the purposes of earning such income.”
The Ld. Commissioner though reproduced the submissions of the Assessee in the impugned order, specifically the judgment of the Tribunal, however, by quoting “the provision of section 57(iii) of the Act and relying on the judgments of the Hon’ble Gujarat High Court in the case of Padmavathi Jaikrishna (1981) 131 ITR 653 and in the case of Sarabhai Sons (P) Ltd. Vs. CIT (1993) 113 taxman 407 201 ITR 462, wherein it was respectively held that in order to decide whether an expenditure is a permissible deduction u/s 57(iii) of the Act, the Ms. Stella D Souza nature of expenditure must be examined and if the dominate purpose for which expenditure was incurred not to earn the income, the expenditure incurred in that behalf would fall outside the purview of u/s 57(iii) of the Act”, held that dominate purpose for the Assessee in taking overdraft was not to earn income but to meet her financial needs and thus interest payment on overdraft is not allowable deduction u/s 57(iii) of the Act.
This Court has given thoughtful considerations to the peculiar facts and circumstances of the case. Admittedly, the assessee has not established the nexus of interest income and overdraft interest expenses. Even from the facts, it is not clear wether the Assessee has made the investment in FD in her individual account or in the company name. Further, it is also not clear from the facts, as to whether the assessee has used the overdraft facility, wholly and exclusively for business purpose only. And therefore these facts are essential to adjudicate the issue involved and thus for just and proper decision of the case and substantial justice, the case is remanded to the file of Ld. Commissioner for decision afresh by analyzation the aforesaid facts as observed above and considering the judgment relied on by the Assessee. Suffice to say, the Ld. Commissioner shall grant reasonable opportunity of being heard to the Assessee.