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2007 (8) TMI 640 - AT - Income TaxDisallowance u/s 36(1)(iii) - Interest paid on borrow funds - Disallowing deduction u/s 36(1)(iii) in respect of interest paid on borrowings which were utilized for acquiring shares as long-term investments? - Such Interest paid related to earning of dividend income which was exempt income u/s 10(33) and consequently, the same was disallowable u/s 14A? - HELD THAT:- The interest paid on the borrowed funds, at the most, could be allowed against the dividend income if investment is made to earn the dividend income. The contention of the assessee is that investment was not made to earn dividend income. Therefore, such deduction could not be allowed even against the dividend income. Even otherwise, such income being exempt the question of deduction against dividend income becomes academic. The interest paid as per the contention of learned counsel for the assessee, could relate to the profits arising from sale of investments since the main object was to hold the investments. Since income arising from sale of investment has to be computed under the head “Capital gains”, the deduction has to be allowed only in accordance with the provisions specified under the head “Capital gains”. The Legislature was aware of the aspect of inflation of price and therefore, it made provisions to determine the indexed cost of acquisition, which would take care of interest cost also. No separate deduction is allowable under this head in respect of interest paid on borrowed funds. Thus, in our opinion, no deduction is allowable to the assessee in respect of interest paid on borrowed funds. All the provisions contained in sections 30 to 43D provide that deduction shall be allowed in respect of the expenditure or allowance mentioned therein. The deduction pre-supposes the existence of receipts chargeable under this head. If the receipts are to be considered under other heads then, question of deduction under the head “Profits and gains from business or profession” would not arise. As already pointed out, receipts and expenditure must go together. We may clarify that the receipt may be actual or to be received in future. The receipt may be on accrual basis. There may be cases that there is no receipt in one year and it may be received in the next year. In such cases, the loss may be computed because receipts may be expected in next year. The crux of the matter is that there must be receipts either actual or on accrual basis before a deduction can be allowed therefrom. Consequently, if receipts, in respect of which expenditures are incurred, are considered under other heads, then the question of determining any income under the head “Profits or gains from business or profession” does not arise. Hence, the contention of the assessee is rejected. Another contention of learned counsel for the assessee is that interest paid should be allowed as deduction against the income by way of interest on debentures, which has been assessed on business income. We are unable to accept this contention too. Assessee cannot plead that income from dealing in shares be taken at Rs. 50,000 and deduction on account of interest on borrowed funds be set off against brokerage income. Thus, it cannot declare loss from brokerage at Rs. 20,000 and income from dealing in shares at Rs. 50,000 and net income from business at Rs. 30,000. In the eye of law, it will have to compute in respect of each source of income and thus there will be loss of Rs. 70,000 from dealing in shares and profit of Rs. 1,00,000 from brokerage business. Under section 70, the assessee can set off such loss but such provision is subject to other provisions of the Act and therefore such loss cannot be set off as per the provisions of the Explanation to section 73. In view of the above discussions, it has to be held that the assessee is not entitled to deduct the interest payment from interest income from holding of debentures as there is no nexus between the borrowed funds and investment in debentures. Admittedly, the borrowed funds were utilized for the purchase of shares of L & T Ltd. and therefore interest paid cannot be set off against income by way of interest on debentures. It has also been submitted by learned counsel for the assessee that in the case of Nikhil Investment Co., the Assessing Officer has disallowed the interest at the same amount in both the years which is factually incorrect. This may be by way of inadvertent mistake and therefore need verification. Thus, the orders of the learned CIT (A) in all the cases are upheld on this issue subject to the rider that the Assessing Officer shall rectify the mistake if the assessee’s contention is found to be correct after verification. Disallowed the exemption income of dividend - Held that:- This issue is covered in favour of the assessee by the decision of the Special Bench in the case of Punjab State Industrial Development Corporation Ltd. v. Deputy CIT [2007] 292 ITR (AT) 268 (Chandigarh) [SB], wherein it has been held no ad hoc disallowance can be made in such cases. Respectfully, following the same, the orders of the Commissioner of Income-tax (Appeals) are set aside on this issue and consequently, the disallowance sustained by him are hereby deleted.
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