2015 (11) TMI 57 - AT - Income Tax

Netting of interest income with interest expense - Disallowance of interest paid to Saraswat Co- op. Bank Ltd - Appellant prays that the claim of the assessee be allowed u/s 57 - whether CIT(A) had failed to appreciate that had assessee not made Fixed Deposit and obtained over-draft, it would lent the money directly, in which case there would have been no interest income on Fixed Deposit and no interest expense on Overdraft - Held that - After considering the provisions of section 56 and 57 of the Act and also the decisions relied upon by both the parties, we hold that the expenditure(other than capital expenditure) shall be allowable only if it is incurred for the purpose of earning income and not vice-versa as held by the Hon ble Supreme Court in the case of CIT v.. V. Gopinathan (2001 (2) TMI 10 - SUPREME Court) . Hence the netting of interest expenditure against interest income from FDR cannot be allowed as the expenditure of interest incurred by the assessee is not wholly and exclusively laid out or expended for making or earning income as per mandate of Section 57(iii) of the Act rather it is vice versa. The assessee has raised the plea for the first time before us that she has given the interest free loan of ₹ 98 lacs to GPL as a measure of commercial expediency because she is the Director of the said company. However the said plea has not been verified by the authorities below. We, therefore, hold that to the extent of borrowing made from SCBL for lending to GPL of ₹ 98 lacs, the interest attributable thereof paid to SCBL shall be allowable to be set off against the interest income if the assessee is able to prove before the assessing officer that the said interest free loan of ₹ 98 lacs given to GPL has been given as a measure of commercial expediency as held by the Hon ble Supreme Court it the case of S.A Builders (2006 (12) TMI 82 - SUPREME COURT) and hence to that extent we allow the appeal subject to verification by the assessing officer and accordingly set aside the matter to the file of assessing officer for necessary verification as detailed above and the assessee will be given proper and adequate opportunity in accordance with the principles of natural justice.However, the interest expenditure paid to SCBL and attributable to the advance of ₹ 92 lacs given to PMIPL shall not be allowed as expenditure to be set off against the interest income from FDR as per reasoning given by us above and hence the contention of the assessee to this extent is rejected. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of interest paid on overdraft against interest income.
3. Applicability of Section 57(iii) for deduction of interest expenditure.
4. Alternative claim under Section 36(1)(iii) for deduction of interest expenditure.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed the appeal late by one day, supported by an affidavit and a medical certificate. The delay was due to the assessee's illness from December 29, 2012, to January 4, 2013. The Tribunal accepted the assessee's contentions and condoned the delay, allowing the appeal to proceed.

2. Disallowance of Interest Paid on Overdraft Against Interest Income:
The assessee declared a total income of Rs. 29,76,148/- and claimed a deduction of Rs. 16,68,880/- as interest expenditure paid to Saraswat Co-op. Bank Ltd. (SCBL) against the interest income of Rs. 46,50,337/-. The Assessing Officer (AO) observed that the assessee had fixed deposits (FDRs) with SCBL and had raised an overdraft of Rs. 1.87 crores against these FDRs. The funds from the overdraft were given as interest-free loans to two companies, PMIPL and GPL. The AO disallowed the deduction of interest expenditure under Section 57 of the Income Tax Act, 1961, citing a direct nexus between the overdraft and the interest-free loans. The AO relied on the decision of the Punjab & Haryana High Court in CIT v. Abhishek Industries Ltd., 286 ITR 1 (P&H).

3. Applicability of Section 57(iii) for Deduction of Interest Expenditure:
The CIT(A) upheld the AO's decision, stating that the funds from the overdraft were given as interest-free loans to PMIPL and GPL, rebutting the presumption of the decision in Reliance Utilities & Power Ltd., 221 CTR 435 (Bombay High Court). The CIT(A) concluded that there was a clear nexus between the overdraft and the interest-free loans, and thus, the interest expenditure could not be allowed under Section 57(iii).

4. Alternative Claim Under Section 36(1)(iii) for Deduction of Interest Expenditure:
The assessee argued that the interest expenditure should be allowed as a deduction under Section 36(1)(iii) since the loans were given due to commercial expediency, especially to GPL, where the assessee is a Director. The Tribunal referred to the Supreme Court's decision in S.A. Builders Ltd., 288 ITR 1 (SC), which allows interest on borrowed funds if the funds are advanced as a measure of commercial expediency. The Tribunal directed the AO to verify if the interest-free loan to GPL was given for commercial expediency and to allow the interest expenditure accordingly. However, the interest expenditure attributable to the loan given to PMIPL was not allowed.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal condoned the delay in filing the appeal and directed the AO to verify the commercial expediency of the loan to GPL for allowing the interest expenditure under Section 36(1)(iii). The interest expenditure attributable to the loan to PMIPL was disallowed. The Tribunal emphasized that the expenditure must be incurred for earning income as per Section 57(iii) and not vice versa, as held in CIT v. V. Gopinathan, 248 ITR 449 (SC).