ORBIS FOUNDATION,GURGAON vs. ITO, WARD- 3(1), GURGAON

This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals] -2, Gurgaon dated 01.01.2018 pertaining to assessment year 2013-14.

The substantive grievances raised by the assessee vide Ground Nos. 1 and 3 read as under:

Briefly stated, the facts of the case are that the assessee is a trust formed on 04.02.2011. The appellant’s trust is neither registered u/s 12A/10(23C) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'] nor registered under the Societies Registration Act. Therefore, the appellant is a society in the status of an AOP. Return for the year was filed on 05.08.2013 declaring income at Rs. 1,52,100/-. The case was selected for scrutiny through CASS and, accordingly, statutory notice was issued and served upon the assessee.

During the course of scrutiny assessment proceedings, the AO noticed that the assessee has earned interest on Fixed Deposits amounting to Rs. 1,13,76,533/-. The AO further noticed that the assessee has also paid interest of Rs. 1,12,04,763/- on over draft facilities. The AO found that the assessee has deducted the said interest from the interest earned on FD. The assessee was asked to explain why interest claimed as deduction against the interest received be not disallowed.

The assessee filed detailed reply vide letter dated 09.12.2015 in which it stated that it had taken loan against the FD to avoid premature encashment of FD. It was explained that if the assessee had encashed the FD before its maturity, not only there would have been loss of interest on FD but the assessee would have lost the source of regular income too. The contention of the assessee did not find favour with the AO who disallowed the claim of deduction on interest expenses and taxed the entire interest income under the head “income from other sources”.

The assessee carried the matter before the CIT(A) but without any success.

Before us, the ld. AR strongly submitted that the earning of interest on FD was a regular source of income and to protect the regular source of income, the assessee had taken over draft facility from the bank on which it paid interest. It is the say of the ld. AR that what is taxed under the head ‘income from other sources’ is the net interest. For this proposition, strong reliance was placed on the judgment of the Hon'ble Supreme Court in the case of ACG Associated Capsules [P] Ltd 343 ITR 89. Reliance was also placed on the judgment of the Hon'ble Punjab and Haryana High Court in the case of Maruti Employees Cooperative House Building Society Ltd.320 ITR 254.

Per contra, the ld. DR strongly supported the findings of the AO. It is the say of the ld. DR that there is no nexus between the interest expenditure and earning of interest on FD and, therefore, the same cannot be allowed u/s 57(iii) of the Act.

We have given thoughtful consideration to the orders of the authorities below. There is no dispute that the assessee purchased FD of Rs. 12 crores out of interest free loan from one trustee, namely, Dr [Mrs] Vimla Lal. There is no dispute that the assessee availed overdraft facility against the said FD and utilised the borrowing towards purchase of shares of a group company. In our considered opinion, the assessee had two options, viz., the assessee could have liquidated the FD and utilised the amount towards purchase of shares of group company and, secondly, the assessee could have taken over draft the FD and utilised the funds towards the purchase of shares of group company. The assessee opted for second option.

In our considered view, the source of interest earning remained intact. However, in doing so, the assessee had to incur interest expenditure on overdraft. The source of income and application of income is same, i.e. FD. Therefore, in our considerate view, netting off of interest has to be allowed to the assessee. Our view is also fortified by the judgment of the Hon'ble Supreme Court in the case of ACG Associated Capsules [P] Ltd [supra]. Ground No. 1 is accordingly allowed.

Next grievance relates to disallowance of short term capital loss of Rs. 29,19,689/-.

Facts on record show that pursuant to an agreement with Swati Rajesh Shah, the assessee lent Rs. 90 lakhs from which Swati Rajesh Shah purchased 77000 shares of M/s Varun Industries. Swati Rajesh Shah pledged the shares with the assessee as security against loan of Rs. 90 lakhs. Subsequently, the assessee sold the shares of M/s Varun Industries which were purchased @ 116.88 and sold at different prices varying from 10.28 to 14.05. Loss in sale of shares was claimed as short term capital loss by the assessee.

It is true that the assessee accepted the shares of M/s Varun Industries Ltd as security against the loan given to Swati Rajesh Shah. It is equally true that the assessee has nothing to do with the profits /losses in the sale of shares of M/s Varun Industries Ltd. If the sale transactions would have resulted into gain, we are certain that the assessee would not have paid the tax on the gains on the plea that the gain belongs to Swati Rajesh Shah. By the same analogy, any loss on sale of shares belong to Swati Rajesh Shah and the assessee has been rightly denied claim of loss. No interference is called for.

In the result, the appeal filed by the assessee is partly allowed. The order is pronounced in the open court on 14.08.2018.