DCIT- CC-1(2), MUMBAI vs. NIRANJAN L. HIRANANDANI, MUMBAI

Since the grounds raised and the issues involved in both the appeals are identical, except for variation in the figures arising out of similar set of facts and findings, therefore the same were heard together and are being disposed of by way of this consolidated order.

As a lead case, we are taking appeal for AY 2015-16 and our findings given in this appeal will apply mutatis mutandis in other appeal also. The grounds of appeal raised by the revenue are reproduced hereunder:- 1.Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), was right in deleting the disallowance of the interest paid on loan and overdraft facility of Rs. 1,47,76,851/- u/s 57(iii) of the Income Tax Act, 1961, by merely holding that the facts of the present case are different from the facts of the case which has been relied upon by the Assessing Officer without considering that the Assessing Officer has merely drawn resemblance and has not relied upon the judgement in the case of CIT Vs. V.P. Gopinathan (2001) 248ITR 449 (SC).

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), was right in deleting the disallowance of the interest paid on loan and overdraft facility of Rs. 1,47,76,851/- u/s 57(iii) of the Income Tax Act, 1961, without deciding the issue on the merits of the case and applicability of the provisions of the section Shri Niranjan L. Hiranandani 57(in) of the Income Tax Act, 1961, the section under which the disallowance has been made by the AO.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), erred in deleting the disallowance of expenditure in the form of interest paid on loan and overdraft facility of Rs. 1,47, 76,85 1/- u/s 57 (iii) of the Income Tax Act, 1961 when the assessee failed to establish that such expenditure has been incurred wholly and exclusively for earning income against which the deduction has been taken.

The facts in brief are that, assessee is an individual and is mainly managing the affairs of the Hiranandani Group in his capacity as Director in various companies /firms of the group. Ld. AO noted that assessee has claimed deduction u/s 57(iii) being interest paid on loans taken from banks. The details of which are as under:- INCOME FROM OTHER SOURCES Interest income: Interest – Bank 4,45,664/- Interest - Bank Kanta Bldg a/c 18,925/- Interest - Deb-HDFC AMC-PMS 3,35,990/- Interest - FD (HDFC) 2,10,788/- Interest - HDFC AMC PMS 5,624/- 10,16,991/- Interest- FD-OBC 1,47,76,851/- Less: Interest paid - ICICI Loan (-)3,06,11,501/- Less: Interest paid - OD-OBC (-)4,55,747/- Nil Income from other sources 10,16,991/- Shri Niranjan L. Hiranandani

Ld. AO asked the assessee to explain how the interest expenditure amounting to Rs.3,06,11,501/- paid on ICICI Loan is deductable claim u/s 57(iii) against the interest income of Rs. 1,47,76,851/- received on fixed deposit with OBC. The assessee has deducted the entire interest income by reducing the interest income by claiming deduction of interest paid to ICICI bank on the loans taken and computed NIL income under the head ‘interest’. In response to the show cause, assessee had submitted as under:-

However, Ld. AO held that in section 57 only that expenditure are allowed which are laid out wholly and exclusively incurred for the purpose of making or earning such income as stipulated in section 57(iii) of the Act. The assessee has incurred interest expenditure of Rs. 3,10,67,248/-, not for earning the interest income on fixed deposits as the loan was obtained on the strength of security on fixed deposit made in the Bank. Thus, relying on the judgment of Hon’ble Apex Court in the case of CIT vs. V. P. Gopinathan (2001) 248 ITR 449 (SC), Ld. AO disallowed the interest income of Rs. 1,47,76,851/- received on FD-OBC.

Ld. CIT(A) held that assessee has adjusted interest paid on ICICI loan against interest from FDR income, to the extent of FDR income and has not claimed remaining the amount of interest paid. Shri Niranjan L. Hiranandani Thus, the income received from FD-OBC has been show at NIL. He referred the judgment of Hon’ble Gujarat High Court in the case of Virmati Ramkrishna vs. CIT (1981) 131 ITR 659 and held that assessee has paid interest for genuine reasons and for business and commercial expediency. Thus, according to him there is indirect connection between interest income and interest expenditure. Here the loan was taken for business purposes with a view to protect interest income from FDR. The relevant observation of the Ld. CIT (A) reads as under:-

2 It appears that in the present case the assessee has paid interest for genuine reasons and for business and commercial expediency. Further there is at least indirect connection between interest income and interest expenditure. In a way the loan has been taken for business purposes, with a view to protect interest income from FDR. There could be a possibility that the assessee had prematurely en-cashed its FDR and in that situation it would not have been required to raise equivalent loan amount from the bank and therefore its interest liability towards bank would have come down. However in that circumstances, the interest income from FDR would been nil and net interest outgo would have reduced. But overall the impact would be nil only. It is seen that loan taken by the assessee from ICICI Bank has been invested in the business only and interest payment is genuine. Therefore Shri Niranjan L. Hiranandani simply brushing aside such an expenditure may not be fair, while interest income from FDR is being taxed separately. 8.3 xxx 8.4 xxx 8.5 xxx

6 The AO, while rejecting the claim of the assessee has relied upon the judgement of the Hon'ble Supreme Court in case of CIT vs. V.P. Gopinath 248 ITR 449. The assessee however argued that the facts of the present case are clearly distinguishable and keep distinguishing features are as under: - i) The assessee in the said case (V.P. Gopinath case) had borrowed loan on security of the same FD on which interest was earned. In the case of the assessee before your Honours, borrowings are not on security of the FD placed. ii) The assessee in the said case (V.P. Gopinath case) had claimed that only net interest income after setting off interest paid is real income as placement of FD and borrowing of loan was a mutual transaction. The assessee before your Honours, claim of interest paid is under specific head and based on specific provision of the Income Tax Act and not merely on real income theory. iii) In the said case, the claim for deduction of interest paid was not based on section 5 7(iii), rather it was conceded by counsel of assessee before Tribunal that case does not fall within section 5 7(iii). In the present case, the claim is under section 57(iii) and Shri Niranjan L. Hiranandani detailed submissions have been made earlier in support of its claim. iv) The assessee submits that another feature that distinguishes the case is the fact that the assessee is promoter of a large group and has invested sizeable amounts in various entities as listed at page 4 of the submissions. The investments are varied and not only in FD as was the case in Gopinath's case. The assessee accordingly argued that the reliance of the AO on the said judgement is misplaced. I have considered the arguments of the assessee and the facts of the case and feel that the facts of the present case are slightly on different footing vis-a-vis the case of V.P. Gopinath in as much as in that case provision of Sec 57(iii) were not the subject matter of the decision. Besides the assessee is a promoter of a large group and has substantial investments in the business, unlike the case of V.P. Gopinath, where investments were only in FDs. Thus the facts of the present case are distinguishable.

7 In view of the above facts and legal position the claim of the assessee towards interest payment to the extent of FDR interest income appears to be on account of commercial expediency and is at least indirectly linked to the interest income. The same is therefore directed to be allowed. Consequently, the decision of the AO to treat the interest income separately under the head other sources is directed to be deleted. Shri Niranjan L. Hiranandani

We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. Here in this case, assessee had earned interest income of Rs. 1,47,76,851/- from the fixed deposits with OBC bank. The assessee has also taken loan against property from ICICI bank on which he paid interest of Rs.3,06,11,501/-. Now against interest income of Rs. 1,47,76,851/- from FDRs, assessee has claimed deduction of Rs.3,06,11,501/- u/s 57(iii) as expenditure incurred wholly and exclusively for earning of income from other sources. Nowhere it is borne out from the record as to what is the nexus between loan taken from ICICI bank and earning of interest from FDR which has not been demonstrated how it is interlinked or inter-connected. If the loan has been taken for making any business investment in the companies or firms where assessee is a promoter for earning some income, then how same is allowable and to be deducted from the interest income received from FDR.

Before us, Ld. Counsel for the assessee stated that in the computation income, assessee has shown interest earned from FDR Shri Niranjan L. Hiranandani and deducted payment of interest on loan paid on loan to ICICI Bank in accordance with section 70(1), i.e. of set off of loss within one source. However, we find that neither the Ld. CIT(A) nor before the AO there was any such claim, because the case of the assessee was that interest on loan should be allowed as deduction u/s 57(iii) as if there was a direct nexus of interest income on FDR and loan taken from ICICI bank. First assessee has to compute the income from various sources forming part of total income and then if in such computation there is loss in one source of income, then only the question of any set-off will come in picture. There is no computation of income received or accrued from utilization of loan. It is not a case that Loan taken from ICICI Bank was invested for earning any income from other sources or for making any investment in FDRs. Thus, in absence of any such computation there is no question of any set-off.

Apart from that, nowhere the assessee has given any detail where the loan was utilized and what was the corresponding income which has been derived or accrued from such utilization and what income had been derived from which deduction of interest paid can Shri Niranjan L. Hiranandani be allowed, whether such income would be taxable under the head, income from other sources or any other head. Ostensibly, the deduction of expenditure u/s 57(iii) could only be allowed if there is any income earned or accrued or arisen from other sources as given in section 57. There has to be a direct nexus between the expenditure incurred and the income earned, then only assessee is eligible for deduction u/s 57(iii).

Coming to the main contention raised by Ld. Counsel that computation u/s 70 of sub section (1) has to be allowed which provides that where net result in respect of any source for any assessment year following under any head of income other than capital gain, is a loss then assessee shall be entitled to have the amount of such loss against such income from any other sources under the same head. However, in this case there is no loss under income from other sources, because what assessee has done, he has reduced the interest paid to ICICI bank from the interest on FDR which we have noted above no co-relation has been demonstrated. Hence there is no question of allowance of loss which can be set off from the total income of the year. On the contrary, Shri Niranjan L. Hiranandani assessee had positive income from interest on FD of Rs. 1,47,76,851/- and no expenditure or deduction can be allowed for a loan taken for some other purpose, which has not been demonstrated before us except for stating it was utilized for making investment in some of the business concerns and the firms belonging to the assessee. In case if assessee has made investment out of the borrowed funds, i.e., loan taken from the ICICI bank for making investment in the business concern from where he has earned any money, then such interest borne from the loan could have been deducted or allowed to be set off from such income, which is not the case here. Thus, the reason given by the Ld. CIT (A) is set aside.

However, we are remitting this issue to the file of AO only to examine the utilization of loan taken from ICICI bank and whether such utilization of loan is for earning any income from where interest paid on such loan can be allowed as deduction. If there is no corresponding income which can be computed ins the total income, then no such deduction can be allowed. Shri Niranjan L. Hiranandani

In the result, the appeal filed by the revenue is allowed for statistical purposes. Orders pronounced in the open court on 31st October, 2022. (Prashant Maharishi) (Amit Shukla) Accountant Member Judicial Member मुंबई Mumbai;ददनांक Dated : 31/10/2022 Sr.PS. Dhananjay