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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. The captioned appeals filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-28, Mumbai and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). As common issues are involved, we are proceeding to dispose them off by this consolidated order for the sake of convenience. 2. The ground raised by the assessee in this appeal is that the Ld. CIT(A) erred in upholding the order passed by the Assessing Officer (AO) in making the disallowance of interest expenses amounting to Rs.15,16,635/- in AY 2012-13 and Rs.46,42,924/- in AY 2013-14 under the head ‘income from other sources’.
3. We begin with the AY 2012-13. The AO noticed during the course of assessment proceedings that the assessee had claimed interest expenses of Rs.15,16,635/-. The assessee had also earned interest income of Rs.84,76,966/- on deployment of loans and advances of Rs.11,02,21,462/- . The AO observed that the assessee failed to cogently demonstrate the nexus between the interest expenditure and interest income. Therefore, he disallowed the assessee’s claim of interest expenditure u/s 36(1)(iii) of the Act.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) placed reliance on the judgment of the Hon’ble Supreme Court in the case of CIT vs. V.P. Gopinathan (2001) 248 ITR 449 (SC) and dismissed the appeal filed by the assessee.
5. Before us, the Ld. counsel of the assessee submits that during the year under consideration the assessee had earned interest income of Rs.47,04,842/-. In the Return of Income, the said income was not treated as ‘Business Income’ and was offered to tax under the head ‘Income from Other Sources’. Further, during the year under consideration, the assessee had incurred interest expenses amounting to Rs.15,16,635/- for earning the interest income. Therefore, the interest expenses were claimed as deduction from interest income. Accordingly, the net interest income amounting to Rs.31,93,563/- (Rs.47,04,842/- minus Rs.15,16,635/-) was offered to tax under to tax under the head “Income from Other Sources”. During the assessment proceedings, the assessee was asked to submit the nexus between the interest expenses and the interest income earned during the year. It was submitted during the assessment proceedings that the interest was paid towards the loan taken from Bombay Mercantile Co-operative Bank Lt. (‘BMC Bank’). The funds received from BMC Bank were used for the purpose of parking the funds in Short Term Fixed Deposits maintained with Banks and for giving loans to its sister concerns. Therefore, the interest paid to BMC Bank was adjusted against the interest income earned during the year. The Ld. counsel submits that if the said excess funds were invested in earning interest income then the expenses pertaining to earning the interest income has to be adjusted against the interest income. Accordingly, the interest expenses have to be adjusted against the interest income taxed under the head ‘Income from Other Sources’.
Per contra the Ld. DR relies on the judgment of the Hon’ble Supreme Court in V.P. Gopinathan (supra) and decision of the Hon’ble Bombay High Court in CIT vs. Amritaben R. Shah (1999) 238 ITR 777 (Bom).
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. We begin with the decision in the case of V.P. Gopinathan (supra). In that case the assessee had put moneys into fixed deposit with a bank and had earned in the assessment year in question interest in the sum of Rs.1,17,444/- thereon. On the security of the amount so deposited, the assessee took a loan from the bank and paid in respect of the loan interest to the bank in the sum of Rs.90,410/-. The assessee claimed that he could be taxed only on the differential amount of Rs.27,034/-. His contention was rejected by the AO and in first appeal. The Tribunal took a contrary view. The High Court answered the question on the basis that the situation was one of mutuality. In appeal, the Hon’ble Supreme Court held that “It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is: does it make any difference that he took the loan from the same bank in which he had placed the fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank.”
7.1 In the case of Amritaben R. Shah (supra) the Hon’ble Bombay High Court has held that (i) section 57 (iii) provides for deduction only of expenditure incurred wholly and exclusively “for the purpose of making or earning such income”, (ii) in order that an expenditure may be admissible u/s 57(iii) it is necessary that the primary motive of incurring it is directly to earn income falling under the head “Income from other sources” and (iii) u/s 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head “Income from other souces”. 7.2 We are of the considered view that the ratio laid down by the Hon’ble Bombay High Court in the case of Amritaben R. Shah (supra) squarely applies to the present case. We find that neither the AO nor the Ld. CIT(A) has examined the contentious issue in the light of the above decision. Therefore, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make a fresh assessment keeping in mind the ratio laid down in Amritaben R. Shah (supra). We direct the assessee to file the evidence before the AO. Needless to say the AO would give reasonable opportunity of being heard to the assessee.
In the result, the appeal for the AY 2012-13 is allowed for statistical purposes.
Now we move to the AY 2013-14. The order of the AO and that of the Ld. CIT(A) and the arguments of the Ld. DR for the AY 2013-14 are identical to the AY 2012-13. We need not repeat the same.