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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI N.K. PRADHAN, HONBLEShri Jimmy Bhaskar Parikh v.
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-33, Mumbai [hereinafter in short “Ld.CIT(A)] dated 29.03.2016 for the Assessment Year 2011-12.
The only issue in the appeal of the assessee is with regard to disallowance of interest paid on overdraft.
(A.Y: 2011-12) Shri Jimmy Bhaskar Parikh 3. Briefly stated the facts are that, the assessee filed return of income declaring income of ₹.9,96,510/-. The assessment was completed u/s.143(3) of the Act on 27.03.2014 determining the income at ₹.2,68,04,910/-. While completing the assessment the Assessing Officer disallowed interest on overdrafts of ₹.28,70,697/-. The assessee earned interest of ₹.33,91,510/- from Fixed Deposits and also incurred interest on overdrafts at ₹.28,70,697/-, in the return of income filed, the assessee reduced the interest paid on overdraft from the interest earned on fixed deposits and the net income of ₹.5,20,813/- was offered under the head “Income from other sources”. It was the contention of the assessee that interest earned on interests is fully offered for tax after deducting the interest paid on overdraft, net interest is offered for tax. The Fixed Deposits are made out of sale proceeds of shares sold in Financial Year 2008-09. The interest on overdraft was used for acquiring residential flat. In case the assessee had not availed the overdraft on fixed deposits he would have encashed the fixed deposits to pay for the property and in that case the net interest income would have been lower. Not convinced with the submissions of the assessee the Assessing Officer disallowed the interest on fixed deposits in terms of provisions of section 57 of the Act. on appeal the Ld.CIT(A) sustained the disallowance against which the assessee is in appeal before us.
(A.Y: 2011-12) Shri Jimmy Bhaskar Parikh 4. Ld. Counsel for the assessee reiterated the submissions made before the lower authorities. It was further submitted that interest on overdraft was incurred by the assessee to protect the source of income i.e. the fixed deposits and it is a commercial expediency. He placed reliance on the decision of the Agra bench in the case of Rajkumar Agarwal v. DCIT in ITA.No. 176/Agra/2013 dated 18.07.2014 in support of his contention.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. The Assessing Officer disallowed the interest paid on overdrafts as he was of the view that the expenditure was not incurred wholly and exclusively for the purpose earning the interest income and therefore the claim of the assessee for reducing the interest paid on overdraft against interest earned on fixed deposits was denied. This action of the Assessing Officer was sustained by the Ld.CIT(A) agreeing with the view of the Assessing Officer by holding as under: - “11. I have carefully considered the submissions of the appellant but find no merit in it. There is, no dispute that the interest income earned from the fixed deposit of Rs, 33,91,510/- is to be taxed as "income from other sources". In this regard, I find that section 57(iii) of the I. T. Act provides as under: "The income chargeable under the head "income from other sources" is to be computed after making the following deductions, namely (i) xxxxx (ia) xxxxx (A.Y: 2011-12) Shri Jimmy Bhaskar Parikh (ii) xxxxx (ii a) xxxxx (iii) any other expenditure (not being in the nature of capital expenditure) out or expended wholly any exclusively for the purpose of making or earning such income. It is clear from the plain reading of the aforesaid provisions that only those expenditure, which are incurred wholly and exclusively for the purpose of earning such income, are admissible deduction on computation of income under the' head "income from other sources". Particular attention is required with respect to the words "wholly and exclusively" and "such income".
The question to be decided here is whether interest paid on Overdraft of ₹.28,70,697/- can be said to have been incurred wholly and exclusively for the purpose of earning such income i.e. interest income from the fixed deposit. The AO has taken the view that interest paid on overdraft cannot be said to be incurred "wholly and exclusively" for the purpose of earning interest income from the fixed deposit. On the. other hand, the claim of the appellant is that in the instant case, had the Bank Fixed Deposits were encashed & overdraft not availed, there would not be any taxable interest as on encashment of FDs, no interest would accrue. This is irrespective of the fact that the funds from Overdraft were utilised for the acquisition of the Flat, 13. In the instant case, the fixed deposits were made out of sales proceeds of equity shares sold by the appellant in F.Y. 2008-2009 relevant to A.Y. 2009-10. The overdraft facilities were utilized as & when the payments for acquisition of the flats were made. As-such, during the year, total payment of Rs. 28,70,697/- was made to the bank against this overdraft facility. Thus from the facts of the case, it is very clear that the overdraft facility was taken for acquisition of the flat and hence the act of using overdraft facility and payment of interest therein cannot be considered to be incurred "wholly and exclusively" for the purpose of purchase of the fixed deposit, earning of interest from it or even keeping alive that source of income. Once the making of fixed deposits preceded the sanction of overdraft facility and the appellant is making huge tax free gain by selling various scripts in different years, the claim of the appellant that had the Bank fixed deposits were encashed & overdraft not availed, there was no taxable interest, as on encashment of FDs. no interest would accrue. Such claim has no basis as subsequent to making the FDs the appellant had sufficient cash balance for acquiring the flat It is also highlighted by the AO that even in the year under consideration the appellant had given loans and advances to the tune of Rs 2,03,24,574/- on which no interest income is offered.
Apart from that in para 7.6 of the submission, the appellant has given an example to justify his stand. However, the claim is erroneous. Hon'ble ITAT, Mumbai bench in the case of Lupin Ltd., Mumbai vs ACIT in dated 17.02.2016 has clearly held in the concluding paragraph that "However, even granting deducibility, the parameters of section 57(iii) do not admit of expenditure being incurred to sustain a predetermined loss, which again points to the expenditure being involuntary- another aspect of (A.Y: 2011-12) Shri Jimmy Bhaskar Parikh the matter emphasizing its' non-deductibility. The deduction for interest paid would thus be limited to the quantum of interest received on the like (principal) amount for the same period, defined as from a particular date to a particular date." From the above, it emerges that if the expenditure is predetermined and involuntary, it will be inadmissible u/s 57(iii). Moreover, the deduction for interest paid would be restricted to the quantum of interest received on the like (principal) amount for the same period. In the instant case, payment of interest on overdraft is predetermined, involuntary and detrimental to the earning of the interest on FD. Moreover, while there is no matching concept as far as principal amount and the period are concerned for the purpose of interest earned and interest paid. While interest is earned for the entire FD for the whole year, interest has been incurred for relatively smaller withdrawals from overdraft facility & for a limited period of the year, resulting into positive interest amount.
The appellant has relied upon the judgment of Hon'ble ITAT, Agra bench in the case of Rajkumar Agarwal vs DCIT in dated 18th July, 2014 On carefully reading of the judgments, I find the facts are distinguishable as in that case the predominant feature as noticed by the Hon'ble bench was that the FDR was purchased at the interest rate of 11.10% while "at the time of taking the loan, the interest rate was 8.5% and the intention of the assessee in not encashing the FDR was to save higher interest rate. In the instant case, the interest rates on overdraft were higher as compared to the FDs. Moreover, as already stated earlier, in the instant case, the appellant was never short of money that requires overdraft from bank for installment payments for bank. As mentioned in the preceding paragraph, during the year under consideration, the appellant had ample surplus money available with him so that he offered interest free loans and advances to the tune of Rs 2,03,24,574/-, Apart from that, I respectfully disagree with the following observation of the Hon'ble tribunal in the aforesaid case that "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 necessary for earning that income, it shall still be deductible in computation of income" In my humble opinion, the aforesaid observation is contrary to the expressed provisions of section 57(iii) as well decisions rendered in the cases of Hon'ble Mumbai Tribunal in Lupin Ltd., Mumbai vs ACIT (supra) and Hon'ble Gujarat High Court in Virmati Ramakrishna vs CIT (1981) 131 ITR 659. The Hon'ble Gujarat High Court in Virmati Ramakrishna (supra) has clearly held as under:- "(3) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning "income from other sources'. (4) the purpose of making and earning such income must be the purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for any mixed purpose. (5) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate (A.Y: 2011-12) Shri Jimmy Bhaskar Parikh purpose and not the motive or personal considerations weighing the mind of the assesses in incurring the expenditure." From the above it is apparent that the expenditure must be incurred for earning such income i.e., the income in question under income from other sources and not any income, as suggested by the Hon'ble Tribunal, Agra Bench in the case of Rajkumar Agarwal vs DCIT (supra).
It also find that the issue under consideration is covered by the recent decision of Hon'ble Kerala High Court in the case of Malankara Plantation Ltd. vs ACIT (2016) 236 Taxmam 61 (Kerala). The Hon'ble High Court has clearly held in para 6 as under; "The income in question was returned as income from other -sources. When an income has been returned as income from other sources, one of the head of income provided in section 40, deduction can also be only under the provisions in the same head of income. Therefore, in respect of income from other sources, deduction of income is permissible only under section 57, sub section (iii) of which provides for deduction under any other expenditure (being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. Evidentially, the provision is not attracted in the case in question and, therefore, the Assessing Officer has rightly declined the. claims of the assessee."
In the light of discussion made in the preceding paragraphs and respectfully following the aforesaid judgments, I am of considered opinion that the AO has rightly disallowed expenses of Rs. 28,70,697/- as claimed u/s 57(iii) of the Act and hence the addition is confirmed. Thus ground of appeal
no. 2 is disallowed.”
7. On a careful perusal of the order of the Ld.CIT(A) who has considered the decision of the ITAT Agra Bench in the case of Rajkumar Agarwal v. DCIT (supra), decision of the Mumbai Bench in the case of Lupin Limited v. ACIT in ITA.No. 4061/Mum/2011 dated 17.02.2016 and the decision of the Hon'ble Kerala High Court in the case of Malankara Plantation Ltd. v. ACIT (supra), concluded that the expenses incurred by the assessee on overdraft account is not incurred wholly and exclusively for the purpose of earning interest income and therefore not allowable as deduction u/s. 57(iii) of the Act. The order passed by the Ld.CIT(A) is a (A.Y: 2011-12) Shri Jimmy Bhaskar Parikh well-reasoned order and do not call for any interference. Thus, we sustain the order of the Ld.CIT(A) and reject the ground raised by the assessee.
In the result, appeal of the assessee is dismissed.
Order pronounced in the open court on the 31st October, 2018