NISHITH RAJNIKANT SHAH,MUMBAI vs. ACIT 10(3), MUMBAI

The first ground of the assessee relates to disallowance of claim of interest of Rs.14,23,651/- out of income from other sources. The assessee is also aggrieved for disallowance u/s.14A of Rs.13,00,262/-.

Rival contentions have been heard and record perused. In this case the assessee fled its return of income on 20-9-2009 declaring total income at Rs.19,89,122/-. The assessee is a Director in M/s Friends Fab Form Pvt. Ltd. During the year under consideration the assessee shown salary income, income from partnership firms, Long Term Capital Gain on sale of property and income from other sources. During the course of assessment proceedings, the AO noted that assessee had shown bond 2 interest income of Rs.6,18,900/-, interest from parties at Rs.7,95,377/- and bank interest of Rs.9,374/- under the head income from other sources against which expenditure of Rs.14,33,444/- and other expenses of Rs.20,834/- were claimed. The AO noted that the claim of deduction was restricted to the interest income of Rs.14,23,651/- in the statement of computation. The AO asked the assessee to furnish details of the funds utilized for earning interest income and prove the nexus of the expenditure claimed with the Income from other sources u/s.57(iii) including the details of loans taken, loans given and investments made from the date the said transactions were initially carried out in the earlier years. The AO further observed that no details were furnished for other expenses of Rs.20,834/-. The AO held that as per provisions of Section 57(iii), deduction is allowable to the assessee only for the expenditure which is wholly and exclusively incurred for earning of income u/s.56, and accordingly disallowed the expenditure of Rs.14,23,651/- for want of details and added to the total income of the assessee. The AO also computed disallowance u/s.14A amounting to Rs.13,00,262/-.

By the impugned order the CIT(A) confirmed the action of the AO, against which the assessee is in further appeal before us.

It was contended by ld. AR that assessee was having sufficient interest free funds, therefore, no disallowance of interest can be made u/s.14Ain view of the decision of Hon’ble Bombay High Court in the case of Reliance Utilities, 313 ITR 310. He further relied on the decision of Hon’ble Supreme Court in the case of Rajendra Prasad Moody, 115 ITR 3 519 (SC) in support of the proposition that while allowing the claim of interest under the head income from other sources, it is not necessary that such investment should bring some income to the assessee.

On the other hand, ld. DR relied on the order of the authorities below.

We have considered rival contentions, gone through the orders of the authorities below and found from the record that assessee’s claim for interest expenditure against income from other sources was declined by the AO on the plea that assessee could not establish that interest expenditure was incurred for earning the income from other sources. Our attention was invited to the fact that assessee has invested in HDFC Savings Bonds in the earlier two years. Investment in saving bonds are made partly out of the borrowed funds on which assessee has paid interest. As per ld. AR, part of the funds were out of own capital. Since the investment in HDFC savings bond continued in the year under consideration, the interest on the aforesaid loan of Rs.4,20,000/- @9% for the period from 1st April, 2008 to 31st March, 2009 amounting to Rs.37,800/- is required to be allowed. Further we found that on 18th May, 2005 the assessee had made investment of Rs.4,00,000/- in HDFC Bonds which was made out of the assessee’s own funds withdrawn from the partnership firm and therefore, the assessee has not used the borrowed funds for making the investment of Rs.4 lakhs in HDFC bonds. Further, on 25th July, 2005 the assessee made further investment of Rs.6,50,000/- in HDFC bonds for which the assessee had utilized a loan of Rs.1 lakh from M/s R.C.Shah(Estate). Therefore, interest @9% on Rs.1 4 ITA No.3165/12 lakh i.e. Rs.9000/- is required to be allowed against the interest earned on HDFC Saving Bonds. Ld. AR drew our attention to further investment of Rs.15 lakhs made in HDFC bond out of the refund of capital from M/s Heatreaters & Engineering withdrawn loan from M/s Prasol Chemical Ltd.. Since on such funds no interest was paid, no disallowance was warranted. It appears that the AO has not verified all these factual position while disallowing the interest expenses. Keeping in view the proposition of law laid down by the jurisdictional High Court in the case of Reliance Petro Chemicals Ltd., no disallowance of interest is to be made when the assessee is having own funds/non-interest bearing funds. In the interest of justice and fair-play, we restore the entire matter back to the file of AO for deciding afresh keeping in view our above discussion and the proposition of law laid down in the case of Reliance Utilities (supra).

In the result, appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on this 18/11/2015.