2012 (1) TMI 375 - AT - Income Tax

Summary

Issues Involved:
The judgment involves the consideration of whether interest payable to Citi Bank for part financing investments in 54EC Bonds is allowable as a deduction u/s 57(iii) of the Income Tax Act, and whether the assessee's own certification regarding the loan funds could have been ignored in deciding the allowability of interest on such loan bonds.

Issue 1 - Deduction u/s 57(iii) for interest paid on loan for investments in Bonds:
The case pertains to the deduction under sec. 57(iii) of the Act on account of interest paid to Citi Bank for part financing investments in Bonds specified in sec. 54EC of the Act. The assessee sold shares and earned capital gains, out of which a portion was held back for payment in a subsequent year. The assessee claimed deduction under sec. 54EC and invested in designated bonds, for which a loan was taken from Citi Bank due to nonavailability of funds. The Assessing Officer disallowed the interest expense on the ground of lack of nexus between interest earned and interest paid. However, the CIT(A) allowed the interest paid on the loan for the purchase of bonds, considering the income earned on bonds as offered for tax and thus allowing the expenditure under sec. 57(iii) of the Act.

Issue 2 - Nexus between borrowed funds and interest paid:
The contention was whether the interest paid on funds borrowed for investment in bonds should be allowed as a deduction. The Revenue argued that since the funds were borrowed for capital gain exemption under sec. 54EC, the interest paid cannot be allowed as a deduction. On the other hand, the assessee's representative highlighted that the borrowed funds were used to invest in bonds and earn interest, establishing a direct nexus between the borrowed funds and interest paid. The Tribunal observed that the borrowed funds were indeed utilized for acquiring bonds and earning interest, and thus held that the interest payable on borrowed capital should be allowed as a deduction based on the interest earned on such investments.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue and directed the Assessing Officer to verify and allow the claim of the assessee for deduction of interest based on the interest earned on the investments made with borrowed funds. The decision was pronounced in the Open Court on 25th January, 2012.