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2012 (10) TMI 809 - HC - Income TaxDisallowance of loss under the head 'income from other sources' - In-genuine transaction - ITAT rejected invitation on the ground that it was not an investigating agency & allowed the claim - Held that:- Section 57 provides for deductions in computing the income under the residuary head i.e. 'income from other sources'. Clause (iii) of the Section allows deduction of any expenditure (not being in the nature of capital expenditure) laid out or expended wholly or exclusively for the purpose of making or earning such income. Interest paid on borrowings made for making investments with the object of making or earning income falls for consideration under this clause. As rightly pointed out on behalf of the Revenue, the principle would apply to a genuine case of borrowing and lending and if there are materials to show that the transaction of borrowing and lending was sham or was got up with the purpose of avoiding or reducing the tax liability, nothing prevents the revenue authorities from ignoring the claim. The difficulty in the present case with the order of the Tribunal is that despite being told that there are several unusual features which throw considerable doubt on the assessee's claim for deduction of the interest, it did not consider it proper to examine the matter further, but chose to take umbrage on the principle that the Tribunal cannot be expected to act as an investigating agency. It is true that the Tribunal cannot by itself embark upon an investigation and try to raise a new issue or make out a new case for the revenue which has not occurred to the revenue authorities, however, in the present case the AO did indicate the broad contours of the intention of the assessee to reduce his tax liability by claiming interest under Section 57(iii) on borrowings allegedly made from companies belonging to the same group for the purpose of acquiring shares, again in companies of the same group, which were closely held and did not yield any dividend. It is therefore, not a case where the Tribunal, for the first time, was being invited to investigate into an aspect which was not raised by the income tax authorities. The Tribunal, with respect, was not justified in brushing aside the invitation on the ground that it was not an investigating agency and has to limit itself to the issues raised before it. The issue as raised before it was the motive of the assessee and the Tribunal, given the status as the ultimate fact finding authority under the Act, ought to have remanded the matter, so that the motives of the assessee in making huge claims for deduction of interest under Section 57(iii) are made known to those who matter, particularly the taxing authorities - thus set aside the orders of the CIT (Appeals) and the Tribunal on the point of Section 57(iii) and remand the cases to the AO for de novo proceedings - in favour of revenue.
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