2014 (3) TMI 1009 - AT - Income Tax

Income on capital gain - assessee has made investment in IPOs from his saving bank account and not by using the OD a/c - Held that - The assessee utilized OD Limit mainly for making advances to others and to earn short term capital gain which is more than the expenditure and it also fulfill the condition of Section 57(iii) of the Act. According to this section expenditure must be made wholly and exclusively for earning income and that such income must have been earned. It is not the case of the A.O. that the loan funds were utilized for the purpose of earning tax free income. Both the A.O. and the ld CIT(A) have not given their fact finding clearly on this issue as discussed above otherwise also as per the settled position of law where interest is received on fixed deposit and interest is paid on loan obtained on the security of that fixed deposit only the net interest is chargeable to tax on the principle of mutuality. On these facts and circumstances of the case the Hon ble Rajasthan High Court in the case of Hamendra Singh vs CIT 1987 (7) TMI 73 - RAJASTHAN High Court held 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

Summary

Issues Involved:
1. Confirmed addition of Rs. 3,61,605/- made on account of interest paid to the bank.
2. Nexus between interest received on Fixed Deposit Receipts (FDRs) and interest paid on Overdraft (OD) account.
3. Applicability of Section 14A of the Income-tax Act, 1961.
4. Legal ground not pressed by the assessee.

Issue-wise Detailed Analysis:

1. Confirmed Addition of Rs. 3,61,605/- Made on Account of Interest Paid to the Bank:
The assessee's appeal challenges the addition of Rs. 3,61,605/- made by the Assessing Officer (A.O.) on account of interest paid to the bank. The A.O. disallowed this interest under Section 14A of the Income-tax Act, 1961, reasoning that the interest paid on the overdraft facility, which was used to invest in assets generating exempt income, does not have a direct nexus with the interest received on FDRs. The A.O. relied on the decision of the Delhi Bench in the case of Cheminvest Ltd. vs ITO to support the disallowance.

2. Nexus Between Interest Received on FDRs and Interest Paid on OD Account:
The assessee argued that the interest earned on FDRs and the interest paid on the OD account are directly related, as the FDRs were purchased from the assessee's own funds, and the OD facility was availed against these FDRs. The assessee received interest on FDRs amounting to Rs. 17,25,644/- and paid interest on the OD account totaling Rs. 3,61,605/-. The assessee contended that since the OD account was opened against the FDRs, there is a direct nexus between the interest received and the interest paid, and thus, the interest paid should be allowed. However, the CIT(A) found that the assessee had not clearly demonstrated the nexus between the interest paid on the OD account and the investment in IPOs and shares.

3. Applicability of Section 14A of the Income-tax Act, 1961:
The CIT(A) upheld the disallowance under Section 14A, stating that the assessee failed to prove the exact nexus between the interest paid on the overdraft facility used for investment in IPOs and the interest received on FDRs. The CIT(A) noted that the assessee's surplus funds were already invested in FDRs, and the OD facility was used for investments generating exempt income. The CIT(A) also referenced the Rajasthan High Court's decision in Hamendra Singh vs. CIT to support the disallowance. However, the Tribunal found that the assessee utilized the OD facility mainly for advancing money to various persons for earning interest, which is part of taxable income. The Tribunal observed that the assessee had sufficient own funds and did not obtain any new loan during the year. The Tribunal concluded that the assessee's method of utilizing funds resulted in net income and that Section 14A was not applicable as the loan funds were not utilized for earning tax-free income.

4. Legal Ground Not Pressed by the Assessee:
The legal ground raised by the assessee was not pressed during the hearing and was accordingly dismissed.

Conclusion:
The Tribunal allowed the appeal of the assessee on merits, ordering the deletion of the addition of Rs. 3,61,605/- made on account of interest paid to the bank. The Tribunal concluded that the assessee had demonstrated a direct nexus between the interest received on FDRs and the interest paid on the OD account, and that the disallowance under Section 14A was not justified. The appeal was partly allowed, with the legal ground not pressed by the assessee being dismissed.