PARIKSHIT MANDIR SIAL,MUMBAI vs. ITO (IT)- 4(2)(2), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-58, Mumbai, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income-tax Act, 1961 (for short „Act‟), dated 26.02.2016 for Assessment Year 2013-14.

Briefly stated, the assessee had filed his return of income for Assessment Year 2013-14 on 30.07.2013, declaring total income of Rs. 38,28,609/-. The case of the assessee was subsequently selected for scrutiny assessment under 143(2) of the Act.

During the course of the assessment proceedings the A.O observed that the assessee had offered interest income of Rs. 20,51,062/- in his return of income. On a perusal of the details, it was noticed that the assessee had earned interest income of Rs. 58,35,655/- viz. (i). Interest on Fixed deposits : Rs. 57,48,933/-; and (ii). Other interest : Rs. 87,727/-. It was observed by the A.O that the assessee after claiming deduction of interest expenses of Rs. 37,84,593/- pertaining to a loan raised from the bank (against the security of FDR), had offered the balance interest income of Rs. 20,51,062/- for tax in his return of income. The A.O called upon the assessee to justify his claim of deduction of the interest expense of Rs. 37,84,593/- under Sec. 57 of the Act. In reply, it was submitted by the assessee that the aforesaid interest expenditure pertained to a bank loan (against security of the FDR) which was raised by him for purchase of a Flat No. 201, Sea Goddess, Juhu, Mumbai in joint ownership with his mother. It was submitted by the assessee that by raising the bank loan he was able to protect the interest income received on the FDR. Alternatively, it was submitted by the assessee that as the interest expenditure was incurred on the funds borrowed for acquisition of a property, thus, the same would even otherwise be entitled for deduction under Sec. 24(b) of the Act. However, the A.O observing that there was an absence of an inextricable nexus between the incurring of the interest expenditure and earning of the interest income as required under Sec. 57(iii) of the Act, therefore, disallowed the claim of deduction of Rs. 37,84,593/- raised by the assessee. On the basis of the aforesaid deliberations the A.O assessed the income of the assessee at Rs. 76,13,200/- .

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee before him, was however not persuaded to subscribe to the same. Observing, that the interest expenditure of Rs. 37,84,593/- was not wholly and exclusively incurred by the assessee for earning of the interest income, the CIT(A) taking

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized representative (for short „A.R‟) for the assessee took us through the facts of the case. It was averred by the ld. A.R that the lower authorities had erred in disallowing the claim of deduction of the interest expenditure while assessing the income of the assessee. The ld. A.R vehemently stressed on the fact that the decision of the assessee for not opting for a premature encashment of the FDR‟s and rather raising a loan from the bank to facilitate purchase of residential property, was backed with the intent of protecting the interest income received from the fixed deposits. The ld. A.R in order to drive home his contention that the interest expenditure incurred was liable for being set off against the interest income on FDR‟s, relied on the order of a coordinate bench of the Tribunal, viz. Raj Kumar Aggarwal Vs. DCIT, Circle-2, Agra (ITA No. 176/Agra/2013; dated 18.07.2014). Per contra, the ld. Departmental representative (for short „D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the incurring of the interest expenditure did not bear any nexus with the earning of the interest income on the fixed deposits as required per the mandate of Sec. 57(iii) of the Act, therefore, the same was rightly disallowed by the lower authorities. The ld. D.R

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that the deductions allowed against the income chargeable under the head “Income from other sources” are circumscribed in Sec. 57 of Shri. Parikshit Mandir Sial Vs. ITO (I.T)-4(2)(2), Mumbai Act. Still further, in case of interest income earned by an assessee, only the expenditure (not being in the nature of a capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is to be allowed as a deduction under Sec. 57(iii) of the Act. We thus, in the backdrop of the facts of the case before us, are of the considered view that as the interest expenditure of Rs. 37,84,593/- incurred by the assessee on the loan raised for purchase of property (against the security of FDR‟s), cannot be construed as having been laid out or expended wholly and exclusively for the purpose of making or earning of the interest income on the said FDR‟s, therefore, the same cannot be allowed as a deduction as against the interest income of the assessee. We are of the considered view that the existence of an inextricable nexus between the incurring of the interest expenditure and earning of the interest income is a pre-requisite condition for allowability of the interest expenditure as a deduction under Sec. 57(iii) of the Act. We find that our aforesaid view stands fortified by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Dr. V.P Gopinathan (2001) 248 ITR 449 (SC). The Hon‟ble Apex Court deliberating on the issue under consideration, in the backdrop of identical facts as were involved in the case before them, had observed as under:

We have given a thoughtful consideration to the aforesaid claim of the assessee in the backdrop of the facts available on record. We find that the fact that the claim of the assessee that the loan was raised by him for purchase of a residential property viz. Flat No. 201, Sea Goddess, Juhu, Mumbai in joint ownership with his mother, finds mention in the assessment order. We though are not oblivious of the fact that the assessee had in his return of income not raised a specific claim as regards deduction of the interest expenditure under Sec. 24(b) of the Act, but the same as observed by us hereinabove, was backed by the reason that the assessee had claimed the same as a deduction under Sec. 57(iii) of the Act. Be that as it may, we are of the considered view that though the claim of deduction under Sec. 24(b) was not raised by the assessee before the lower authorities, but as the fact as regards incurring of interest expenditure on the loan raised by the assessee on purchase of a residential

We have deliberated at length on the issue under consideration and are of the considered view that the interest expenditure incurred by the assessee on the loan raised by him, to the extent the same is relatable to the funds utilized by him towards purchase of his share of ownership in the residential property viz. Flat No. 201, Sea Goddess, Juhu, Mumbai, would be eligible for deduction under Sec. 24(b) of the Act. We thus, restore the matter to the file of the A.O, who shall after making necessary verifications allow the deduction of Shri. Parikshit Mandir Sial Vs. ITO (I.T)-4(2)(2), Mumbai Sec. 24(b) of the Act to the assessee. The Ground of appeal