TMI Blog2014 (3) TMI 1009X X X X Extracts X X X X X X X X Extracts X X X X ..... that immediate purpose of taking loans was to construct a house and in that view of the matter, even if the loan was taken on security of his FDRs in order to maintain his interest income therefrom was irrelevant. It has been held that interest paid on the loans could not be said to be the expenditure incurred wholly and exclusively for earning income from other sources. On the first reading it seems that because higher rate of interest was paid on the loans in that case and also in the case under reference, the ratio of that decision applied. However, in that case the loan was taken for construction of house and not for the purpose of earning income. In the given case, the facts are entirely different. The assessee had his own funds which he utilized in such a manner that he has earned net income from interest and by not making any fresh investment in IPOs but has earned income on capital gain as discussed above. Accordingly, we are left with no option but to hold that this addition deserves to be deleted. We order to delete this addition and allow the appeal of the assessee on merits - ITA No. 970/JP/2013 - - - Dated:- 5-3-2014 - Hari Om Maratha (Judicial Member) And N. K. Sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A of the Act. The A.O. has relied on a decision of Delhi Bench in the case of Cheminvest Ltd. vs ITO in ITA No.87/Del/2008 dated 5th Aug. 2009. Hence, the claim of the assessee was rejected and the addition of ₹ 3,61,605/- has been made. 2.2 Aggrieved, the assessee preferred an appeal and also made detailed submission before the ld CIT(A) which is incorporated in the appellate order itself. After considering the written submissions, the ld CIT(A) has noted that it is true that the assessee has received interest of ₹ 17,25,644/- on the FDRs @ 9.75% p.a. and the FDRs have been purchased from surplus funds available with him. The ld CIT(A) has also found that during the relevant year, against these FDRs the assessee has taken overdraft facility and has paid interest, @ 10.75%, totaling to ₹ 3,61,505/-. The ld CIT(A) has observed that O.D. Account does not clearly state how much over draft facility has been availed against the FDR. Rather, he has found that during the year, the overdraft facility was used to make invest in the IPOs and shares, to the extent of ₹ 26,40,550/- during this year, apart from the overdraft taken to advance loans to other persons o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... left with any surplus funds and to this extent the submissions are an incorrect presentation of facts per se. iii) The next argument of the appellant is that he paid interest on the overdraft of ₹ 3,61,605/- whereas he had declared interest earned as income of ₹ 17,25,644/- on the FDR. The rate of interest received on FDR was 9.75% and interest rate on OD was 10.75% and it has been claimed that the amount of interest paid should be set off against the interest received on FDR. Once again this a spurious argument since an allowance of interest paid on OD limit against interest received can be given u/s 57(iii) only when a nexus is established between earning of interest and expenditure incurred on earning of this interest. In the case of appellant no such nexus exists between the interest paid on overdraft facility which, was used to finance his investment in lP0 which did not bear a direct nexus with the earning of interest on FDRs therefore the claim of interest paid cannot be allowed as expenditure against interest income earned u/s 57(iii). This rationale is further supported by the finding of Hon. Rajasthan High Court in the case of Hamendra Singh vs. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend income was tax free should be disallowed u/s 14A. vi) Reliance was placed on the cases of CIT vs. Hero Cycles (2010) 233 CTR74 (P H) 323 ITR 518 and Yatish Trading Co. P..Ltd. vs. ACIT,(2011) 50 DTR 158 (Mun0.However it is seen that the facts of the cases' relied on are distinct from the facts of the case of the appellant. In the case of Hero Cycles, the nexus between the exempt income and expenditure was not established whereas in the case of the appellant there is a direct nexus between the interest paid on overdraft taken from the bank and investment made in IPOs whose dividends was exempt. Similarly in Yatish Trading Co. P. Ltd. it has been held that in trading in shares, the dominant object was to earn profit and dividend was only incidental and the shares are securities held as stock-in-trade and should not be taken as investment for the purpose of disallowance u/s 14A. The facts of the case of the appellant are clearly distinct from the facts of Yatish Trading Co. P. Ltd. because shown as stock-in-trade in P L Account and but as investment in balance sheet and that is why the income has been treated as capital gain and not profit from business and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on OD a/c. which are in a way are interdependent. In case the assessee were to apply for shares from his own funds no money or lesser funds would have remained to be deposited in FDRs and in that case he would earn lesser amount of interest. In that view of the matter, it has been contended that in fact the assessee has not obtained any interest bearing loan for making investment in shares and, therefore, Section 14A of the Act is not attracted. The thrust of the ld. AR is on the submission that by devising this method, the assessee has earned lesser interest on his own funds because part of the funds has been utilized for investment in shares. It was stated that the assessee has also disclosed the income of ₹ 28,85,524/- from other sources and this fact has been used to establish that the assessee had surplus funds on which he did not pay interest. It has been further stated by the ld. AR that even if investment was made in share application, the same did not automatically invited disallowance of interest because investment in shares is primarily meant for earning income and receipt of dividend is incidental thereto. It is stated that the assessee has earned short term capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other persons from whom the assessee received interest which is also part of taxable income. It is seen that the assessee has made investment in IPOs from his saving bank account and not by using the OD a/c. The following charts depicting the utilization of funds and withdrawals made during the year justify the claim of the assessee. Interest payment of over draft 361605 Short term capital gain income 254823 Interest from parties 2885254 Investment in IPO (average per month) 200000 Investment in shares 0 Particulars Rate Amount Interest received on FDR 9.75% 1725644 Interest paid on OD limit 10.75% -361605 Net income from bank interest (FDR interest OD interest paid) 1364039 Interest charged from debtors 15% 1158655 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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