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2016 (12) TMI 1247 - ITAT CHENNAIDeduction u/s.57(iii)and set off of interest income earned on ICD’s from pre-operative expenditure - Held that:- From the facts of the case it is evident that out of the bank loan of ₹ 4500.96 crores the unutilized portion of ₹ 1,555 crores was placed in fixed deposit with the bank by the assessee. Therefore, the source of the FD is directly linked to the bank loan obtained by the assessee wherein there is a cost, being the proportional interest payable to the bank. Section 57(iii) of the Act makes it amply clear that any expenditure incurred for the purpose of earning income which is taxable under the head “Income from other source” has to be allowed as deduction. In the above case, for the interest income earned by the assessee there is a direct link to the proportional interest paid by the assessee. Therefore, as per section 57(iii) of the Act, the assessee would be entitled to the benefit of deduction with respect to the proportional interest expenditure incurred by the assessee towards earning interest income. Following the decision of the Hon’ble jurisdictional High Court in the case of VGR Foundation [2007 (6) TMI 158 - MADRAS HIGH COURT ] has held that the assessee is entitled to set off the interest income earned on ICDs from the pre-operative expenditure because the share application money received by the assessee company do not fall under the category of borrowed fund and is inextricably linked with the business of the assessee. Interest received from ICDs the source of which are from share application money which is interest free has to be set off against the pre-operative expenses of the assessee because they are inextricably linked to the setting up of the business of the assessee. Disallowance under section 14A - Held that:- We find merit in the order of the learned Commissioner of Income Tax (Appeals) on this issue. If investments are made in “growth mutual funds” yielding only capital gain/loss which is taxable income under the head ‘Capital Gain”, then the provisions of section 14A will not be applicable because provisions of Section 14A deals with expenditure incurred in relation to income not includible in total income, needless to mention that expenditure incurred in such situation will go to add to the cost of asset wherein provisions of Section 14A of the Act will not be applicable. Since the learned Commissioner of Income Tax (Appeals) has only remitted back the matter to the file of the learned Assessing Officer for verifying the mode of investment and decide according to the above ratio laid down, we do not find it necessary to interfere with his order on this issue also.
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