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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
Per Chandra Poojari, Accountant Member This appeal is against the order of the Principal Commissioner of Income-tax (Central), Bangalore [PCIT] passed u/s. 263 of the Income-tax Act, 1961 [the Act] dated 25.3.2021 relating to assessment year 2016-17. 2. The grounds raised are as follows:-
“1. The order of the learned A O in so far as it is against the appellant is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
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The learned Pr. CIT failed to appreciate that there was no error much less an error prejudicial to the interest of the revenue in the order passed by the learned Assessing Officer warranting revision u/s.263 of the Act and consequently, the order passed by the learned Pr. CIT is opposed to law and facts of the appellant's case and requires to be cancelled. 3. The learned Pr.CIT ought to have appreciated that the issue with regard to allowance of interest claim was duly examined by the learned A.O. in the assessment proceedings and therefore, the assessment order passed u/s. 143[3] of the Act, dated 29/10/2018 cannot be regarded as erroneous in so far it is prejudicial to the interest on Revenue to take action u/s. 263 of the Act. 4. Without prejudice to the above, the learned Pr. CIT failed to appreciate that interest paid of Rs. 49,11,102/- to HSBC Invest Direct Financial Services [India] Ltd., was to earn interest received from fixed deposit and thus the same was allowable as a deduction from interest income under the facts and in the circumstances of the appellant’s case. 5. Without prejudice to the above, the learned Pr. CIT erred in holding that the source of deposit in CGDA Scheme was the net consideration received on the transfer of capital asset on account of spirit of section 54F and that the identity of the deposit in the CGDA Scheme becomes that of the Net Consideration received on transfer of the capital asset without appreciating that there are no statutory provisions in the Act to arrive at such a deeming fiction and therefore, the said view taken is opposed to law and facts of the appellant’s case and thus, the same deserves to be vacated. 6. The learned Pr. CIT erred in holding that on the same logic it was also to be deemed that the investment in Mutual funds made by the appellant was from out of the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., without appreciating that there are no statutory provisions in the Act to arrive at such a deeming fiction and therefore, the said view taken is opposed to law and facts of the appellant’s case and thus, the same deserves to be vacated.
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The learned Pr. CIT ought to have appreciated that the net consideration from transfer of capital asset was utilized for investment in mutual funds and the deposit in the CGDA Scheme was made from out of the loan availed from HSBC Invest Direct Financial Services [India] Ltd., and that there was no prohibition under the provisions of the Act for making the aforesaid investments and deposits and hence, the disallowance of the interest claimed u/s. 57 of the Act is opposed to law and facts of the appellant’s case. 8. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered.” 3. The facts of the case are that the assessee is an individual, deriving income from M/s. N. Ranga Rao & Sons Pvt. Ltd. and is a partner in the firm “Green Acres”. It is submitted that the assessee is one of the promoter shareholders of M/s. Rangsons Electronics Pvt. Ltd. [hereinafter referred to as “REPL”] holding 2,66,575 equity shares in the said company. 4. During the financial year relevant to the earlier assessment year 2015-16, the assessee in ITA No.676/Bang/2021 had sold 1,97,258 equity shares in REPL to one M/s Cyient Ltd., on 02/01/2015, for a consideration of Rs. 53,68,80,654/-. In respect of the said transfer of equity shares, he computed long term capital gains of Rs. 51,52,06,362/- in respect of which, exemption u/s. 54F of the Act, of Rs. 10,27,53,118/- was claimed. 5. It is submitted that the net sale consideration of Rs. 51,87,63,126/- received on the transfer of 1,97,258 shares in REPL was initially invested in mutual funds. Thereafter, with a view to claim exemption u/s 54F of the Act, the assessee was required to make a deposit in the Capital Gains Deposit Account Scheme [CGDA Scheme]. Hence, the assessee had availed a loan from HSBC Invest Direct Financial Services [India] Ltd., on the security of mutual funds. Out of the loan so availed, the assessee deposited an amount of Rs. 13.50 Crores in the CGDA Scheme with
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Corporation Bank. Accordingly, he claimed exemption u/s.54F of the Act to the extent of the deposit made in the CGDA scheme for the AY 2015-16. 6. For the AY 2016-17 under appeal, the assessee had originally filed his return of income u/s.139[4] of the Act on 31/03/2017 reporting total income of Rs.46,94,130/- apart from exempt capital gains of Rs.14,13,79,119/- u/s.10[38] of the Act. In the return of income filed, he claimed deduction with regard to the interest expenditure of Rs. 49,11,102/- on the loan taken from HSBC Invest Direct Financial Services [India] Ltd., [which loan raised by the appellant was invested in CGDA Scheme deposit of Rs. 10,30,00,000/-] from the interest earned of Rs. 41,54,640/- on the deposits made in the CGDA Scheme. ORIGINAL ASSESSMENT: The case of the assessee was selected 7. for limited scrutiny under CASS for examination of “Large value of transaction [sale of equity with delivery] reported in Securities Transaction Tax Return and sale consideration disclosed in capital gains schedule is significantly less [STT Code 2 and sale consideration in Sch.CG of ITR] and “Large deduction claimed u/s.57 [Deduction claimed under the head “Income from other sources” u/s.57 in schedule OS of ITR”. Thus, one of the issues examined in course of the assessment proceedings related to the interest paid on loan availed from HSBC Invest Direct Financial Services [India] Ltd., that was claimed as a deduction u/s.57 of the Act against the interest income earned on Fixed deposits parked under the CGDA Scheme. After verifying all the details / particulars / explanation tendered, the deduction claimed was allowed and the income returned was accepted in the order of assessment passed u/s.143[3] dated 29/10/2018.
REVISION u/s 263 8. The PCIT issued a notice u/s. 263 of the Act dated 12/03/2021 proposing to revise the assessment order passed u/s. 143[3] of the Act,
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dated 29/10/2018 on the ground that the same was erroneous and prejudicial to the interest of the revenue. According to him, the deduction claimed in respect of interest paid on loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., against the interest received from the CGDA scheme deposit was not proper and the Assessing Officer ought to have disallowed the same. Accordingly the AO had failed to examine this aspect and had allowed the claim without inquiring into the same.
In response to the aforesaid notice, the ld. AR for the assessee raised objections to the proceedings taken up u/s 263 of the Act. It was pointed out that the AO had enquired into the claim made by the assessee and had allowed the deduction only after examination of the documentary evidence adduced and there was a proper application of mind and hence, there was no jurisdiction to revise the assessment order. That apart, the assessee also justified the deduction allowed by pointing out that there was a clear and direct nexus between the loan availed and the fixed deposits made in the CGDA Scheme. He contended that there was no prohibition under the Act in making deposits in the CGDA Scheme from any source and that there was no requirement to make the aforesaid deposits only out of the sale consideration to avail the benefits of section 54F of the Act.
However, the PCIT passed the impugned order u/s. 263 of the Act dated 22/03/2021, holding that the assessment order passed by the AO u/s. 143[3] of the Act, dated 29/10/2018 is erroneous and prejudicial to the interest of revenue and directed the AO to disallow the interest paid by the assessee against the interest received from CGDA Scheme. Besides, if the assessee claims that such interest is allowable as a deduction against the income received by him on account of investments made in the Mutual Fund Scheme, he can made such claim before the AO, who will consider
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the claim as per law and pass appropriate orders for the purposes of allowing assessee’s claim. Thus, the Assessment order was restored to the file of the AO for this purpose. Against this, the assessee is in appeal before us. LEGAL ISSUE:
The ld. AR firstly submitted that the assessment order passed u/s. 143[3] of the Act, dated 29/10/2018 cannot be regarded as erroneous in so far as it prejudicial to the interest of Revenue for invoking the provisions of section 263 of the Act. From the records relating to the assessment proceedings, it is clear that the AO had examined the deduction claimed by the ASSESSEE u/s. 57 of the Act, from the interest income offered to tax. In course of the assessment proceedings, the assessee had made detailed submissions and had proved the nexus between the borrowed funds and the investment made in the CGDA Scheme and there is no dispute on this aspect of the matter. Having regard to the material adduced, the A.O. was satisfied with the maintainability of the claim and hence, the same was allowed. Thus, it cannot be said that the A.O. had not made any enquiries into the deduction claimed by the assessee especially since the case was taken up for scrutiny for the said reason only. Hence, the PCIT erred in holding that the learned A.O. had allowed the claim without making any enquiries into the matter. 12. Further, it is submitted that in terms of Explanation 2 to Section 263[1] of the Act, an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner: [a] the order is passed without making inquiries or verification which should have been made; [b] the order is passed allowing any relief without inquiring into the claim;
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[c] the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or [d] the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 13. Tested on the anvil of the aforesaid deeming provisions of Explanation 2 to section 263[1] of the Act, the ld. AR submitted that the assessment order passed u/s. 143[3] of the Act dated 29/10/2018 cannot be regarded as erroneous or prejudicial to the interest of revenue as held by the PCIT. As already submitted, the A.O. had made inquiries and verification in course of the assessment proceedings that were warranted before allowing the deduction claimed by the appellant u/s. 57 of the Act. Furthermore, it is not a case where the A.O. had allowed the deduction without making any inquiry as there was due application of mind by the A.O. before passing the assessment order. Hence, the conditions mentioned in [a] & [b] above that are sought to be invoked for treating the assessment order as erroneous are not attracted to the case of the assessee. Further, the Pr. CIT has not established that the case of the assessee comes within condition [c] or [d] mentioned above. Thus, it cannot be said that the order passed was erroneous insofar as it is prejudicial to the interests of the revenue and accordingly, the impugned order u/s 263 of the Act dated 22/03/2021 is bad in law and the same deserves to be quashed. The ld. AR relied on the following case laws:- - Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC) - Max India Ltd., 295 ITR 295 (SC) - CIT v. Cyber Park Development & Constructions Ltd., 430 ITR 55 (Kar)
The ld. DR supported the order of the PCIT.
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We have considered the rival submissions on the legal issue with regard to invoking the provisions of section 263 of the Act by the PCIT. The PCIT can exercise revision proceedings u/s. 263 if he is satisfied that the order of the AO sought to be revised is erroneous and prejudicial to the interests of the revenue. Section 263 empower the PCIT to initiate section 263 proceedings where the AO either takes a wrong decision without considering the material on record or he takes a decision without making proper enquiry and that such enquiry was prima facie warranted. If the PCIT was of the opinion that there was no proper enquiry by the AO and the AO accepted the various claims of the assessee mentioned in his order without conducting further enquiry with regard to the genuineness of the claim of the assessee and it is incumbent on the part of the AO to come to an independent conclusion that various expenditure claimed by the assessee were laid out wholly and exclusively for the purpose of business of the assessee.
In the present case, the AO vide notice u/s. 142(2) dated 23.7.2018 inter alia asked the following questions:- “6. It is seen that you have claimed deduction u/s. 57 under the head income from other sources. The complete brake up of the same along with justification and evidence may be filed.” 17. The assessee furnished reply vide letter dated 12.9.2018 as follows:- “7. I have borrowed loan from HSBC Invest Direct Financial Services for investment in Fixed Deposit with Corporation Bank, Interest paid of Rs.49,11,108/- is claimed as deduction against interest earned on Rs.41,54,640/-. Copy of HSBC Bank Interest Certificate is enclosed as Attachment – 5. This is the only deduction claimed from Income from Other Sources.” 18. Further, vide notice u/s. 142(1) dated 18.9.2018, the AO asked for the following details:-
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“1. Statement of HSBC Invest Direct Financial Services loan account taken for investment in Fixed Deposits. 2. Detailed schedule of fixed deposits giving information on date of investment bank and branch FD No. amount invest etc.,” 19. For this, the assessee replied vide letter dated 22.10.2018 as follows:- “1. I have taken Loan of Rs.10,30,000/- from HSBC Invest Direct Financial Services (India) Ltd. loan A/c.No. PBN/2015/3158-00 on 28.9.2015. 2. The said sum was utilized for making Fixed Deposits with Corporation Bank, Mysore Main Branch, Mysore, on 29-09- 2015. 3. I am attaching loan statement from HSBC Invest Direct Financial Services (India) Ltd. and also Corporation Bank Pass Book copy which reflects the credit of Rs.10,30,00,000/- being the loan from HSBC Invest Direct Financial Services (India) Ltd. and Debit of the same towards making of the Corporation Fixed Deposits. 4. As there is direct nexus between the Fixed Deposits made and loan taken, interest paid on HSBC Invest Direct Financial Services (India) Ltd. Loan has been claimed as a deduction from the interest earned on Corporation Bank Fixed Deposits.”
Now the real controversy between the parties is with regard to the extent of enquiry which was made by the AO while framing the assessment. The contention of the ld. AR is that there was detailed enquiry by the AO on the issue taken up by the PCIT u/s. 263 of the Act, as such exercising jurisdiction u/s. 263 is bad in law. On the other hand, the ld. DR contended that the AO has accepted the claim of assessee without proper verification on wrong assumption of facts as well as law, as such without proper examination the assessee’s claim was allowed which is
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prejudicial to the interests of the revenue, as such exercise of jurisdiction u/s. 263 by the PCIT is correct.
Having heard the rival submissions, we are unable to agree with the contentions of the ld. AR. The very basis on which action was taken by the PCIT is that the AO had not carried out the enquiry which he should have. The Delhi High Court in the case of Gee Vee Enterprises Ltd. v. Addl.CIT & Ors., 99 ITR 375 (Del) held that, “lack of enough enquiry by the ITO is patent from record ……………… Although details are filed by the assessee, the ITO did not make any enquiry by way of cross verification. He merely accepted the statement of the assessee without any enquiry or investigation”. Further, in CIT V. Sophia Finance Ltd., 205 ITR 98 (Del)(FB), it was held that when full enquiry had not been made by ITO, CIT could exercise jurisdiction u/s. 263.
In the present case, there is no full enquiry on the impugned issues. The AO has accepted the claim of assessee which is not correct as seen from the facts of the case. The claim of set off of interest by the assessee is not examined by the AO in proper perspective. Being so, the order passed by the AO on an incorrect assumption of facts and incorrect appreciation of law without applying the correct principles of law and without making full enquiry, the order being erroneous insofar as it is prejudicial to the interests of revenue, the PCIT rightly assumed jurisdiction u/s. 263 of the Act. On merits 23. On merits, the ld. AR submitted that there is no dispute or doubt with regard to the source of the fixed deposits made under the CGDA Scheme, which is from out of the funds borrowed from HSBC Invest Direct Financial Services [India] Ltd. There is a clear and direct nexus and hence, the appellant had claimed deduction u/s. 57 of the Act in the return of income
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and the same was also allowed by the A.O. However, the view taken by the ld. Pr. CIT with regard to the allowability of interest expenses of Rs. 49,11,102/- paid to HSBC Invest Direct Financial Services [India] Ltd., is that: [a] It should be deemed that the sale consideration has been invested in the CGDA Scheme by virtue of the provisions of section 54F irrespective of the fact that the appellant had deposited the same in mutual funds in first instance; [b] It should therefore also be deemed that the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., was the source of the investment made in mutual funds. 24. The ld. AR submitted that without availing the loan from HSBC Invest Direct Financial Services [India] Ltd., and servicing the interest thereon, the assessee would not have been able to make the fixed deposit in the CGDA Scheme and thus would not have earned any interest from Fixed Deposit at all. As duly noted and also conceded by the Pr. CIT in the impugned order, there is no requirement for the deposit to be made in the CGDA Scheme only from out of the net consideration received on transfer of the capital asset, which is a settled position of law. It can be done from any source and the deduction claimed u/s. 54F of the Act is allowable. Hence, the Pr. CIT has rightly observed in the impugned order that there was no adverse inference sought to be made with regard to the eligibility to claim deduction u/s. 54F of the Act. However, by virtue of the allowance of deduction u/s. 54 of the Act, it cannot be inferred and held that the source for making the deposit in the CGDA Scheme was the net consideration on account of spirit of section 54F and by stretching the same on logic, it has to be deemed that the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., was invested in mutual funds. There are no statutory provisions that permit such deeming fiction to be assumed and therefore,
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the view taken by the learned Pr. CIT is opposed to law and the same deserves to be vacated. 25. He submitted that, thus, the A.O. had rightly allowed the interest expenses incurred on loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., since the same was incurred to earn the interest received by the assessee on Fixed Deposits made under the CGDA Scheme and therefore, the directions of the Pr. CIT to disallow the same is contrary to law and facts of the assessee’s case. Hence, the aforesaid directions issued by the Pr. CIT deserve to be vacated and the assessment order passed by the learned A.O. u/s. 143[3] of the Act, dated 29/10/2018 requires to be restored. 26. He further submitted that the impugned order dated 25/03/2021 was received by the appellant on 25/03/2021 and the appeal had to be filed on or before 24/05/2021 as per the provisions of section 253[3] of the Act. However, owing to the COVID-19 pandemic, there was a lockdown imposed by the Government of India/Government of Karnataka and considering the prevalent pandemic and consequent dislocation caused, the Hon'ble Supreme Court in Suo Moto Writ Petition [Civil] No.3 of 2020 had relaxed the period of limitation from time to time. Ultimately, the Hon’ble Supreme Court vide order dated 23/09/2021 has held that in case where the period of limitation has expired between 15/03/2020 to 02/10/2021, the said period shall be excluded while computing the period of limitation. In as much as the period of limitation expired on 24/05/2021, the appellant is entitled to file an appeal within the period of 90 days from 02/10/2021 as held by the Hon’ble Supreme Court. Hence, there is no delay in filing the present appeal. 27. The ld. DR submitted that the assessee has taken a loan for investment in the CGDA Scheme for the purpose of availing benefit u/s. 54F of the Act. On the other hand, the assessee invested net sale
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consideration in investment in mutual funds and earned interest thereon. Thus, interest earned on mutual funds have no direct nexus with the interest paid on loan used for the purpose of investment in CGDA Scheme. To allow deduction u/s. 57(iii) of the Act, there should be nexus between the amount incurred to earn income. The amount of interest paid by the assessee on loan was used to make investment in the CGDA Scheme has nothing to do with the interest earned on mutual funds. Being so, this interest receipt and interest payment cannot be set off against each other. For this purpose, he relied on the following orders:- - Hamendra Singh v. CIT, 170 ITR 58 (Raj) wherein it was held that interest was not paid for the purpose of keeping or maintaining the earning of fixed deposit interest but was paid on the amount of loans taken for constructing the house. The motive of the assessee that he took loans on his fixed deposits in order to save them and to maintain his interest income was irrelevant. He had an option to incur the said expenditure. It depended upon his own personal consideration. It was not compulsory. His option had no connection with the earnings of interest from the fixed deposits. It could not be said that the interest was paid wholly and exclusively for the purpose of keeping and maintaining the income of interest therefrom. - CIT v. Bhawal Synthetics (India), 297 CTR 104 (Raj) wherein it was held that In the case in hand, it is not in dispute that the assessee had income of interest through FDRs and while setting off that the Assessing Officer as well as the ITAT did not examine the aspect as to under which provision the assessee claimed deduction or set off of his income from other sources against interest payable on the borrowed fund. The reason given is that the amount pertaining to FDR was not surplus amount but part of amount that was kept to obtain letter of credit for purchase of machinery. While accepting the fact that the FDR was for obtaining letter of credit to purchase machinery but so far as interest earned thereon is concerned, that is nothing but income through other sources, as such, the Commissioner
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rightly treated the same as income taxable. So far as the second question is concerned as to whether the Commissioner was justified in invoking powers under Section 263 by holding that the enquiry conducted by the Assessing Officer before the assessment order was neither proper nor adequate, it can be said that the order passed by the Assessing Officer nowhere reflects about any enquiry said to be made. It simply refers the explanation given by the assessee and nothing beyond that. - Smt. Padmavathi Jaikrishna v. Addl. CIT, 166 ITR 176 (SC) wherein the Supreme Court held that In order that the claim for the deduction could be sustained, it was for the assessee to satisfy the ITO that the loan interest in respect of which was claimed as deduction was laid out or expended wholly and exclusively for earning the income from out of which the deduction was claimed. In the instant case, the taxing authorities as also the High Court had clearly recorded a finding of facts that the expenditure was to meet the personal liability of payment of income-tax and wealth-tax and annuity. Therefore, the High Court rightly held that so far as meeting the liability of income-tax and wealth-tax was concerned, it was indeed a personal one and payment thereof could not at all be said to be expenditure laid out or expended wholly and exclusively for the purpose of earning income. So far as annuity deposit was concerned, the High Court had come to the right conclusion that the dominant purpose was not to earn income by way of interest but to meet the statutory liability of making the deposit. The test to apply is that the expenditure should be wholly and exclusively for the purpose of earning the income. Accordingly, interest paid by the assessee could not be allowed as a deduction. - Kaviraj Mahipat Singh v. CIT, 175 CTR 310 (Raj) where the Assessee took loans from banks against fixed deposits held by him in same banks. He received interest on said deposits and also paid interest on loan. 70 per cent of loan amount was used for construction of house and balance for business purpose. ITO rejected assessee’s claim that only net interest income was taxable and disallowed 70 per cent of interest
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paid on loan corresponding to part of loan used for house construction. The Rajasthan High Court held that in view of Supreme Court’s decision in CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449/116 Taxman 489, ITO’s action was justified and called for no interference. - H.H. Maharajakumari Meenakshideviavaru v. CIT, 150 ITR 247 (Kar) where it was held that the deduction of excess interest by the bank was effected on account of the premature termination of the fixed deposits and had no connection with the interest earned by the assessee up to the date of termination. The Tribunal was, therefore, justified and the assessee was not entitled to the deduction claimed.
Thus, he submitted that even otherwise the interest incurred by the assessee is in the capital field as it relates to acquisition of new asset which cannot be allowed as a deduction. Without prejudice to the above, he submitted that the asset acquired by the assessee is in the nature of personal asset, being so, interest incurred by the assessee is in personal nature which cannot be considered u/s. 57(iii) of the Act. He supported the order of the PCIT. 29. We have considered the rival submissions on merits. In this case, the assessee received the sale consideration on sale of shares. The sale consideration was used for purchase of mutual funds. For making deposit under CGDA Scheme, the assessee has taken loan from HSBC Bank and paid interest thereon. The interest paid on loan has been claimed as deduction out of interest received from fixed deposit parked under CGDA Scheme u/s 57(iii) of the Act. 30. Similar issue came up for consideration before this Bench of the Tribunal in the connected cases of Anirudh Murthy Ranga & Anr. ITA No.676 & 677/Bang/2021 for the same AY 2016-17, and the Tribunal vide even order dated 14.02.2022 held as under:-
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“24. At this stage, it is appropriate to examine provisions of section 57(iii) of the Act which reads as follows:- “57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :— (i) …… (ii) …… (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;” 25. This section provides for deduction of 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 from other sources. Section 57 allows certain specific deduction of other income referred to in section 56. The deduction u/s. 56 is allowable only if they are within one or other clauses enumerated in that section, not otherwise. 26. In the present case, the borrowings were made by the assessee to deposit in the CGDA Scheme so as to avail the benefit u/s. 54F of the Act. The assessee has paid interest on the loan availed for the purpose of making investment in CGDA scheme. The assessee used the sale consideration receive on sale of shares in mutual funds and earned interest out of it. The assessee wants to set off the interest paid on loan amount out of interest income received from mutual funds. As seen from the above, the borrowings are not made to make investment in the mutual fund and earn interest therefrom. The borrowed amount was used to make investment in CGDA scheme. The interest income was received by the assessee from mutual funds only was totally independent of the borrowings. The interest expenditure is incurred not for the purpose of earning income, but it is on the borrowings used for investment in CGDA scheme. At this stage, it is appropriate to place reliance on the case of Karnataka Forest Plantations Corpn. Ltd. v. CIT, 156 ITR 275 (Kar) wherein it was held as under:-
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“12. The borrowings were not made to make investments and earn interest from them. The borrowed amounts kept in short- term deposits undoubtedly yielded interest. The interest income from such deposits was from such deposits only and was incidental to and was the result of the same. The interest income was totally independent of the borrowings. As pointed out by the Bombay High Court in CIT v. Jagmohandas J. Kapadia [1966] 61 ITR 663 at page 669 in interpreting the corresponding section 12(2) of the 1922 Act relied on by the ITO also, the expenditure incurred must be for the purpose of making or earning the income; which is not the position in the present case. In examining the claim, the incongruities and hardship caused, cannot obviously blur our approach. From this it necessarily follows that the conclusions of the ITO concurred with by the Commissioner are unexceptionable. 13. In Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) that interpreted section 12(2) which is the leading case on the point and around which a volume of case law has grown and which were all relied on, by Shri Sarangan the facts in brief were these: Eastern Investments Ltd. an investment company under an arrangement with one of its major shareholder reduced its share capital and issued him debentures with the approval of the High Court under the Companies Act, 1956, paid out interest to that shareholder and claimed that as deduction under section 12(2) as paid out wholly and exclusively for earning its other income which was negatived by the income-tax authorities and the Calcutta High Court. But, the Supreme Court in reversing the decision of the Calcutta High Court and accepting the case of the assessee expressed thus: "This being an investment company, if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction under section 12(2) of the Income-tax Act. Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law. The only argument urged against allowing this deduction to be made is that the person who took the debenture was the party who sold the ordinary shares. It cannot be disputed that if the debentures were held by a third party, the interest payable on the same
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would be an allowable deduction in calculating the total income of the assessee-company. What difference does it make if the holder of the debentures is a shareholder? There appears to be none in principle in view of the fact that no suggestion of fraud is made in respect of the transaction which is carried out between the company and the Administrator and which has been sanctioned by the Court. If the debentures had been paid for in cash by the same party, no objection could have been taken to allowing the interest amount to be deducted. In principle, there appears to us no difference, if instead of paying in cash the payment of the price is in the share of giving over shares of the company, when the transaction is not challenged on the ground of fraud and is approved by the Court in the reorganisation of the capital of the company. In our opinion, therefore, the ground on which the Income-tax Appellate Tribunal and the High Court disallowed the claim of the assessee is not sound." (p. 7) What was paid by the assessee in that case was interest or an expenditure in respect of its income and it was on that basis, the Supreme Court found that the case attracted section 12(2). But, that is not the position in the present. In my view the true ratio of this case far from supporting the case of the petitioner, supports the case of the revenue. 14. In Seth R. Dalmia v. CIT [1977] 110 ITR 644, the Supreme Court was again dealing with a case under section 12(2) on expenditure incurred in the acquisition of shares by the assessee as such. Even the principles enunciated in this case that reiterate the principles enunciated in Eastern Investments Ltd.'s case (supra) do not support the case of the petitioner. The numerous other cases of other High Courts relied on by Shri Sarangan to which it is not necessary to make a detailed reference, did not deal with the exact question that arises for determination in these cases on similar fact situations and, therefore, do not really bear on the point and assist the petitioner.
In Traco Cable Corpn. Ltd. v. CIT [1969] 72 ITR 503, a Division Bench of the Kerala High Court was dealing with a case of receipts or interest paid on share deposits and the
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deductions claimed by the assessee on them under section 57(iii) The Division Bench speaking through Isaac, J., rejected the same in these words: "A reading of the above provision is sufficient to repudiate the contention that the expenditure incurred by the company during the accounting year was incurred for the purpose of making or earning the interest received by the company on the deposit of the share capital. Office and establishment expenses unconnected with the earning of the company or keeping the company alive are not permissible deductions under section 57 of the Act vide the decision of the Calcutta High Court in CIT v. Bihar Spg. & Wvg. Mills Ltd. [1953] 24 ITR 108 (Cal.)." (p. 506) With great respect to their Lordships, I am in complete agreement with these views. On the application of these principles also, the claim of the petitioner for deduction under section 57(iii) cannot be allowed. 16. On the above discussion, it follows that the order of the Commissioner refusing to interfere with the assessments made by the ITO for the two assessment years though he had not fully dealt with the cases and examined the same, as the law expects him to do, is undoubtedly correct and the same does not call for my interference which means that these writ petitions have necessarily to be dismissed. But, before doing that, I deem it proper to suggest to the Government to examine the feasibility of granting relief by amending the Act.” 27. Further in the case of Smt. Padmavathi Jaikrishna v. Addl. CIT, 166 ITR 176 (SC), it was held as follows:- “7. In CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), this Court observed : "The determination of the question before us turns on the true interpretation of section 57(iii) and it would, therefore, be convenient to refer to that section, but before we do so, we may point out that section 57(iii) occurs in a fasciculus of sections under the heading, 'F—Income from other sources'. Section 56, which is the first in this group of sections, enacts in sub-section (1) that income of every kind which is not chargeable to tax under any of the heads
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specified in section 14, items A to E shall be chargeable to tax under the head 'Income from other sources' and sub- section (2) includes in such income various items, one of which is 'dividends'. Dividend on shares is thus income chargeable under the head 'Income from other sources'. Section 57 provides for certain deductions to be made in computing the income chargeable under the head 'Income from other sources' and one of such deductions is that set out in clause (iii) which reads as follows : ** ** ** The expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income………. " (p. 521) In the said decision this Court clearly indicated that: ".……It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. . . ." (p. 522) The taxing authorities as also the High Court have clearly recorded a factual finding facts that the expenditure in this case was to meet the personal liability of payment of income-tax and wealth-tax and annuity. From the order of the Tribunal as also the judgment of the High Court it appears that the assessee had taken the stand that even if the claim relating to income-tax and wealth- tax was not admissible, that part of the claim relatable to annuity deposit should have been admitted as it fetched interest. We are inclined to agree with the High Court that so far as meeting the liability of income-tax and wealth-tax is concerned, it was indeed a personal one and payment thereof cannot at all be said to be expenditure laid out or expended wholly and exclusively for the purpose of earning income. So far as annuity deposit is concerned, the Tribunal and the High Court have come to the right conclusion that the dominant purpose was not to earn income by way of interest but to meet the statutory liability of making the deposit. The test to apply is that the expenditure should be wholly and exclusively for the purpose of earning the Income. The fact-finding authorities have come to the conclusion
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that no part of the expenditure came within the purview of section 57(iii).” 28. In view of the above, in our opinion, unless funds are borrowed for making deposit to earn interest income, such interest paid on borrowings cannot be allowed as deduction in the computation of income from other sources, which in this case, is interest earned from mutual funds. In the facts stated above, there is no doubt that the funds borrowed from HSBC Bank was never used for investment to earn interest income. On the other hand, it has been used to make investment in CGDA Scheme and interest paid on borrowings cannot be set off against interest earned from mutual funds, as borrowed fund is not converted into mutual fund which yielded interest income. Therefore, in our opinion, there is no merit in the arguments of the assessee that interest incurred is to be allowed as a deduction u/s. 57(iii) of the Act out of interest earned from mutual funds which was taxed under the head ‘income from other sources’. Accordingly, the grounds of the assessee on this issue are rejected the appeal is dismissed. 31. The facts and circumstances of the case in the present case being identical to the above case (supra) decided by the Tribunal, following the same and taking a consistent view, we find no merits in the grounds raised by the assessee and reject the same. 32. In the result, the appeal of the assessee is dismissed. Pronounced in the open court on this 14th day of February, 2022.
Sd/- Sd/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore, Dated, the 14th February, 2022.
/Desai S Murthy /
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Copy to:
Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.