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2014 (8) TMI 1101 - AT - Income TaxDisallowance of interest expenditure on borrowings claimed as deduction u/s 57(iii) against the interest income on fixed deposits with banks - Held that:- We find that there is a direct nexus of funds of the borrowed capital with the Fixed Deposits in question partly. The interest paid on a loan taken to avoid premature encashment of the Fixed Deposit is deductible against the interest earned on the Fixed Deposit as held in the case of Raj Kumari Agarwal vs. DCIT vide [2014 (7) TMI 867 - ITAT AGRA ]. Having decided on the issue of nexus of funds and the allowability of the interest expenses against the interest income, the remaining issue is about the interest rate of 7.81% applied by the AO in determining the interest expenses. In our opinion, this requires revisit of the issue to the file of the AO. Assessee must demonstrate before the AO the exact account of interest expenses relatable to the interest income in question. If necessary, AO shall admit the letters from the bank, if any, in the interest of justice. It is the submission of the Ld Counsel that the purpose of funds does not determine the allowability of the claim made u/s 57(iii) of the Act. The decisions relied upon by the Ld Counsel in this regard should be examined by the AO in the remand proceedings. AO shall grant a reasonable opportunity of being heard to the assessee. Accordingly, grounds raised by the assessee are allowed for statistical purposes. Interest earned on advances paid during pre-commencement period - Held that:- In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs. CIT [1997 (7) TMI 4 - SUPREME Court] which is relevant for the proposition that interest earned on surplus funds would need to be treated ‘income from other sources’ and accordingly interest earned on advances paid during pre-commencement period found to be linked to setting up of the plant of the assessee would need to be treated as capital receipt”. Considering the settled position of the issue at the level of the Apex Court, we are of the opinion that the decision taken by the CIT (A) while allowing the assessee’s appeal is fair and reasonable and it does not call for any interference. Accordingly, grounds raised by the Revenue are dismissed.
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