LALA BANSI DHAR & SONS,,NEW DELHI vs. ACIT, NEW DELHI

ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of the ld. CIT(A)-20, New Delhi dated 19.01.2015 for the assessment year 2011-12 on the following grounds :

1. That the order passed by the Assessing Officer and sustained by Learned Commissioner of Income Tax (Appeals) is bad in law on all the points of additions and disallowances.

are without prejudice to each other.”

2. The brief facts of the case are that the assessee filed return on 22.07.2011 declaring total income of Rs.59,25,690/-. Subsequently, the return was revised on 15.12.2011 and the returned income was same. The assessee-HUF is not engaged in any business or profession. Its main source of income is income from house property and income from other sources. The case was selected for scrutiny and statutory notices were issued. During the course of scrutiny proceedings, the AO observed that the assessee had invested a sum of Rs.75,00,000/- in a future project being developed by M/s. Ansal Properties & Infrastructure Ltd. in October, 2008. The said investment was made out of the loan taken in the name of co-parcener Mr. Alok B. Sriram from ICICI Bank and the said loan EMI was paid through co-parcener Mr. Alok B. Sriram. On 31.03.2011, the assessee has reimbursed a sum of Rs.35,99,946/- to Mr. Alok B. Shriram towards EMI/processing fee in respect of the said loan and the total interest was paid by HUF to co-parcener upto 31.03.2011 amounting to Rs.34,32,926/-, which is as under :

Financial Year Ending Amount 31.03.2008 485,251 31.03.2009 10,25,375 31.03.2010 9,57,124 31.03.2011 9,65,176 ----------------- 34,32,926 ----------------- During the impugned year, the HUF cancelled the booking from M/s. Ansal Properties & Infrastructure Ltd., since no project was forthcoming and took back the amount paid to them. On the refund of booking amount of Rs.75,00,000/-, M/s. Ansal Properties & Infrastructure Ltd. gave interest of Rs.20,71,233/-. The HUF set off the interest received from the interest paid to ICICI Bank through Co-parcener u/s. 57 of the IT Act. The AO after considering the submissions of the assessee, did not allow the interest paid on the said loan taken by the Co-parcener of the HUF. He refered to section 57(iii) and also relied on the some case laws. The AO, therefore, concluded that the interest income earned is merely incidental to the cancellation of booking by the assessee and there is no nexus between the expenditure claimed to have been incurred and the income said to be earned by the assessee. Therefore, the reasons and reply submitted by the assessee was not accepted and the AO disallowed the interest paid to the co-parcener to the extent of Rs.20,71,233/- earned by the assessee and the added the same to the income of the assessee u/s. 56 of the IT Act. Feeling aggrieved from the order of the AO, the assessee appealed before the ld. CIT(A) and the ld. CIT(A) also confirmed the action of the AO. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before the Tribunal.

The Ld. Assessing Officer during the assessment required the assessee to explain the deduction. The assessee explained that deduction has been claimed u/s 57(iii) of the Income Tax Act because the earning of interest from M/s. Ansal Properties & Infrastructure Ltd. has a direct nexus with the payment of interest to ICICI Bank and deduction of interest has been restricted to the extent of interest earned. The transaction of earning interest from Ansal’s and payment of interest to ICICI Bank were directly and intrinsically linked, it was submitted.

However, Assessing Officer was not satisfied and he held that provision of section 57(iii) is not applicable to the facts of this case. Reasoning given by the Assessing Officer is contained at Page 6 of Assessing Officer’s Order. Amongst other, Assessing Officer relied upon two judgments as noted at Page 4 of his Order. Both these judgments are in fact in favor of assessee as would be explained hereinafter.

At the CIT(A) stage, all the facts as well narrated to the Ld. AO were reiterated and it was claimed that the deduction u/s 57(iii) is required to be allowed because there was direct nexus of the funds borrowed on which interest was paid and it was the same funds on which interest has been earned by the assessee. The Ld. CIT(A) didn’t agree with the contention of the assessee and upheld the disallowance by relying mainly on the same judgments as were relied by Assessing Officer. Other judgments referred to by the CIT(A) are also discussed in these two judgments.

Therefore, the only question that is required to be decided by the Hon’ble ITAT is as to whether the assessee is eligible to claim deduction against the income earned, offered to tax under the head ‘income from other sources’ upon these facts or not?

The first judgment relied upon by the Ld. Assessing Officer / CIT(A) is that of Smt. Virmati Ramkrishna vs. CIT 131 ITR 659 (Gujarat High Court).

There were two issues involved. The first issue was the proportionate amount of interest on the loan which was admittedly taken for meeting the obligations of personal nature was disallowed. In other words, the interest paid on the funds borrowed for the purpose of making investments was held allowable u/s 57(iii) of the Income Tax Act. The other issue involved was the payment of fee by the assessee to the income tax practitioner which was claimed as deduction u/s 57(iii). The Hon’ble Court was on the view that such amount was also not deductable u/s 57(iii). What Assessing Officer disallowed u/s 57(iii) was proportionate interest on funds borrowed for personal utilization.

The second judgment relied upon by the Ld. Assessing Officer/CIT(A) is that of Hon’ble Supreme Court in the case of Smt. Padmavati Jaikrishna vs. ACIT 166 ITR 176 (SC). The Hon’ble Supreme Court at Page 178 of the said judgment in this case has by relying upon its own judgment in CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) has observed as under:-

“This being an investment company, if it borrowed money and utilized the same for its investments on which it earned income, the interest paid by it on the loan will clearly be a permissible deduction under section 12(2) of the Income-tax Act.”

In CIT v. Rajendra Prasad Moody [1978] 115 ITR 519, this court observed (page 521):

“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 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 earning such income ”

In the said decision, this court clearly indicated that (page522):

“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”. In this case also before Hon’ble Supreme Court, it was found by the Income Tax Officer that out of the loans real investment of the assessee was Rs. 1,250 and disallowance was only for the interest on the borrowed funds which were utilized for the payment of income tax, wealth tax and annuity deposit by the assessee, which was his personal obligations. Therefore, both the judgments relied upon by the Assessing Officer clearly laid down the proposition that if the borrowed funds were realized for the personal purposes, then possibly the deduction u/s 57(iii) cannot be claimed. However, when the borrowed funds have been utilized for the purpose of making investment on which income earned is taxable, then the deduction for the interest on the borrowed funds is required to be allowed. As already clarified there is no dispute about the fact that assessee has earned interest from M/s. Ansal on the funds borrowed for the purpose of making investment in a flat. Therefore, there is a direct nexus and interest paid is wholly and exclusively incurred for the purpose of earning interest income for the same, is prayed to be allowed.