TMI Blog2022 (2) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 263 . Interest incurred to be allowed as a deduction u/s. 57(iii) out of interest earned from mutual funds - In this case, the assessee received the sale consideration on sale of shares. The sale consideration was used for purchase of mutual funds - For making deposit under CGDA Scheme, the assessee has taken loan from HSBC Bank and paid interest thereon. The interest paid on loan has been claimed as deduction out of interest received from fixed deposit parked under CGDA Scheme u/s 57(iii) In the present case, the borrowings were made by the assessee to deposit in the CGDA Scheme so as to avail the benefit u/s. 54F of the Act. The assessee has paid interest on the loan availed for the purpose of making investment in CGDA scheme. The assessee used the sale consideration receive on sale of shares in mutual funds and earned interest out of it. The assessee wants to set off the interest paid on loan amount out of interest income received from mutual funds. As seen from the above, the borrowings are not made to make investment in the mutual fund and earn interest therefrom. The borrowed amount was used to make investment in CGDA scheme. The interest income was received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r much less an error prejudicial to the interest of the revenue in the order passed by the learned Assessing Officer warranting revision u/s.263 of the Act and consequently, the order passed by the learned Pr. CIT is opposed to law and facts of the appellant's case and requires to be cancelled. 3. The learned Pr.CIT ought to have appreciated that the issue with regard to allowance of interest claim was duly examined by the learned A.O. in the assessment proceedings and therefore, the assessment order passed u/s. 143[3] of the Act, dated 29/10/2018 cannot be regarded as erroneous in so far it is prejudicial to the interest on Revenue to take action u/s. 263 of the Act. 4. Without prejudice to the above, the learned Pr. CIT failed to appreciate that interest paid of ₹ 50,05,491/- to HSBC Invest Direct Financial Services [India] Ltd., was to earn interest received from fixed deposit and thus the same was allowable as a deduction from interest income under the facts and in the circumstances of the appellant s case. 5. Without prejudice to the above, the learned Pr. CIT erred in holding that the source of deposit in CGDA Scheme was the net consideration received on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, of ₹ 13,46,76,416/- was claimed. 5. It is submitted that the net sale consideration of ₹ 51,87,63,126/- received on the transfer of 1,97,258 shares in REPL was initially invested in mutual funds. Thereafter, with a view to claim exemption u/s 54F of the Act, the assessee was required to make a deposit in the Capital Gains Deposit Account Scheme [CGDA Scheme]. Hence, the assessee had availed a loan from HSBC Invest Direct Financial Services [India] Ltd., on the security of mutual funds. Out of the loan so availed, the assessee deposited an amount of ₹ 13.50 Crores in the CGDA Scheme with Corporation Bank. Accordingly, he claimed exemption u/s.54F of the Act to the extent of the deposit made in the CGDA scheme for the AY 2015-16. 6. For the AY 2016-17 under appeal, the assessee had originally filed his return of income u/s.139[4] of the Act on 31/03/2017 reporting total income of ₹ 46,94,130/- apart from exempt capital gains of ₹ 14,13,29,537/- u/s.10[38] of the Act. In the return of income filed, he claimed deduction with regard to the interest expenditure of ₹ 50,05,491/- on the loan taken from HSBC Invest Direct Financial Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the loan availed and the fixed deposits made in the CGDA Scheme. He contended that there was no prohibition under the Act in making deposits in the CGDA Scheme from any source and that there was no requirement to make the aforesaid deposits only out of the sale consideration to avail the benefits of section 54F of the Act. 10. However, the PCIT passed the impugned order u/s. 263 of the Act dated 22/03/2021, holding that the assessment order passed by the AO u/s. 143[3] of the Act, dated 29/10/2018 is erroneous and prejudicial to the interest of revenue and directed the AO to disallow the interest paid by the assessee against the interest received from CGDA Scheme. Besides, if the assessee claims that such interest is allowable as a deduction against the income received by him on account of investments made in the Mutual Fund Scheme, he can made such claim before the AO, who will consider the claim as per law and pass appropriate orders for the purposes of allowing assessee s claim. Thus, the Assessment order was restored to the file of the AO for this purpose. Against this, the assessee is in appeal before us. LEGAL ISSUE: 11. The ld. AR firstly submitted that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermore, it is not a case where the A.O. had allowed the deduction without making any inquiry as there was due application of mind by the A.O. before passing the assessment order. Hence, the conditions mentioned in [a] [b] above that are sought to be invoked for treating the assessment order as erroneous are not attracted to the case of the assessee. Further, the Pr. CIT has not established that the case of the assessee comes within condition [c] or [d] mentioned above. Thus, it cannot be said that the order passed was erroneous insofar as it is prejudicial to the interests of the revenue and accordingly, the impugned order u/s 263 of the Act dated 22/03/2021 is bad in law and the same deserves to be quashed. The ld. AR relied on the following case laws:- - Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC) - Max India Ltd., 295 ITR 295 (SC) - CIT v. Cyber Park Development Constructions Ltd., 430 ITR 55 (Kar) 14. The ld. DR supported the order of the PCIT. 15. We have considered the rival submissions on the legal issue with regard to invoking the provisions of section 263 of the Act by the PCIT. The PCIT can exercise revision proceedings u/s. 263 if he is satisfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which reflects the credit of ₹ 10,50,00,000/- being the loan from HSBC Invest Direct Financial Services (India) Ltd. and Debit of the same towards making of the Corporation Fixed Deposits. 4. As there is direct nexus between the Fixed Deposits made and loan taken, interest paid on HSBC Invest Direct Financial Services (India) Ltd. Loan has been claimed as a deduction from the interest earned on Corporation Bank Fixed Deposits. 20. Now the real controversy between the parties is with regard to the extent of enquiry which was made by the AO while framing the assessment. The contention of the ld. AR is that there was detailed enquiry by the AO on the issue taken up by the PCIT u/s. 263 of the Act, as such exercising jurisdiction u/s. 263 is bad in law. On the other hand, the ld. DR contended that the AO has accepted the claim of assessee without proper verification on wrong assumption of facts as well as law, as such without proper examination the assessee s claim was allowed which is prejudicial to the interests of the revenue, as such exercise of jurisdiction u/s. 263 by the PCIT is correct. 21. Having heard the rival submissions, we are unable to agree with the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Services [India] Ltd., and servicing the interest thereon, the assessee would not have been able to make the fixed deposit in the CGDA Scheme and thus would not have earned any interest from Fixed Deposit at all. As duly noted and also conceded by the Pr. CIT in the impugned order, there is no requirement for the deposit to be made in the CGDA Scheme only from out of the net consideration received on transfer of the capital asset, which is a settled position of law. It can be done from any source and the deduction claimed u/s. 54F of the Act is allowable. Hence, the Pr. CIT has rightly observed in the impugned order that there was no adverse inference sought to be made with regard to the eligibility to claim deduction u/s. 54F of the Act. However, by virtue of the allowance of deduction u/s. 54 of the Act, it cannot be inferred and held that the source for making the deposit in the CGDA Scheme was the net consideration on account of spirit of section 54F and by stretching the same on logic, it has to be deemed that the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., was invested in mutual funds. There are no statutory provisions that permit such deeming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to do with the interest earned on mutual funds. Being so, this interest receipt and interest payment cannot be set off against each other. For this purpose, he relied on the following orders:- - Hamendra Singh v. CIT, 170 ITR 58 (Raj) wherein it was held that interest was not paid for the purpose of keeping or maintaining the earning of fixed deposit interest but was paid on the amount of loans taken for constructing the house. The motive of the assessee that he took loans on his fixed deposits in order to save them and to maintain his interest income was irrelevant. He had an option to incur the said expenditure. It depended upon his own personal consideration. It was not compulsory. His option had no connection with the earnings of interest from the fixed deposits. It could not be said that the interest was paid wholly and exclusively for the purpose of keeping and maintaining the income of interest therefrom. - CIT v. Bhawal Synthetics (India), 297 CTR 104 (Raj) wherein it was held that In the case in hand, it is not in dispute that the assessee had income of interest through FDRs and while setting off that the Assessing Officer as well as the ITAT did not examine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee took loans from banks against fixed deposits held by him in same banks. He received interest on said deposits and also paid interest on loan. 70 per cent of loan amount was used for construction of house and balance for business purpose. ITO rejected assessee s claim that only net interest income was taxable and disallowed 70 per cent of interest paid on loan corresponding to part of loan used for house construction. The Rajasthan High Court held that in view of Supreme Court s decision in CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449/116 Taxman 489, ITO s action was justified and called for no interference. - H.H. Maharajakumari Meenakshideviavaru v. CIT, 150 ITR 247 (Kar) where it was held that the deduction of excess interest by the bank was effected on account of the premature termination of the fixed deposits and had no connection with the interest earned by the assessee up to the date of termination. The Tribunal was, therefore, justified and the assessee was not entitled to the deduction claimed. 28. Thus, he submitted that even otherwise the interest incurred by the assessee is in the capital field as it relates to acquisition of new asset which cannot be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly independent of the borrowings. The interest expenditure is incurred not for the purpose of earning income, but it is on the borrowings used for investment in CGDA scheme. At this stage, it is appropriate to place reliance on the case of Karnataka Forest Plantations Corpn. Ltd. v. CIT, 156 ITR 275 (Kar) wherein it was held as under:- 12. The borrowings were not made to make investments and earn interest from them. The borrowed amounts kept in shortterm deposits undoubtedly yielded interest. The interest income from such deposits was from such deposits only and was incidental to and was the result of the same. The interest income was totally independent of the borrowings. As pointed out by the Bombay High Court in CIT v. Jagmohandas J. Kapadia [1966] 61 ITR 663 at page 669 in interpreting the corresponding section 12(2) of the 1922 Act relied on by the ITO also, the expenditure incurred must be for the purpose of making or earning the income; which is not the position in the present case. In examining the claim, the incongruities and hardship caused, cannot obviously blur our approach. From this it necessarily follows that the conclusions of the ITO concurred with by the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Tribunal and the High Court disallowed the claim of the assessee is not sound. (p. 7) What was paid by the assessee in that case was interest or an expenditure in respect of its income and it was on that basis, the Supreme Court found that the case attracted section 12(2). But, that is not the position in the present. In my view the true ratio of this case far from supporting the case of the petitioner, supports the case of the revenue. 14. In Seth R. Dalmia v. CIT [1977] 110 ITR 644, the Supreme Court was again dealing with a case under section 12(2) on expenditure incurred in the acquisition of shares by the assessee as such. Even the principles enunciated in this case that reiterate the principles enunciated in Eastern Investments Ltd.'s case (supra) do not support the case of the petitioner. The numerous other cases of other High Courts relied on by Shri Sarangan to which it is not necessary to make a detailed reference, did not deal with the exact question that arises for determination in these cases on similar fact situations and, therefore, do not really bear on the point and assist the petitioner. 15. In Traco Cable Corpn. Ltd. v. CIT [1969] 72 ITR 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (2) includes in such income various items, one of which is 'dividends'. Dividend on shares is thus income chargeable under the head 'Income from other sources'. Section 57 provides for certain deductions to be made in computing the income chargeable under the head 'Income from other sources' and one of such deductions is that set out in clause (iii) which reads as follows : ** ** ** The expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income . (p. 521) In the said decision this Court clearly indicated that: . It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. . . . (p. 522) The taxing authorities as also the High Court have clearly recorded a factual finding facts that the expenditure in this case was to meet the personal liability of payment of income-tax and wealth-tax and annuity. From the order of the Tribunal as also the judgment of the High Court it appears that the assessee had taken the stand that even if the claim relating ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
