2014 (5) TMI 1197 - AT - Income Tax

Claim of interest expenses u/s 57(iii) in the light of the assessee s claim of exemption u/s 54EC - assessee has sought to derive double benefit by claiming exemption u/s 54EC in respect of capital gains income and by simultaneously claiming deduction u/s 57(iii) in respect of the interest paid on loan which was taken to invest in 54EC bonds - HELD THAT - We find that there is neither any dispute about the consideration for transfer of shares nor there is any dispute in respect to the fact that 15% amount of the sale consideration was held back by the purchaser and was disbursed only in subsequent years along with interest; and the assessee had offered it to tax too. Since capital gain is to be taxed on the accrual basis, in order, to meet the short fall (15% of balance sale consideration) the assessee had borrowed the loan and in the loan agreement with the bank it is specifically stated that loan taken was to be invested. We find that the loan was taken wholly and exclusively for the purchasing the Bonds. Expenditure on account of interest on loans has been incurred for acquiring the interest yielding bonds, which clearly establishes the nexus between the income earned and the expenditure incurred. It has been rightly noted by the CIT(A) that the interest income earned/ accrued on such bonds has been offered for tax as income from other sources and the expenditure incurred for earning such income is allowable u/s 57(iii) and therefore there is clear link and nexus between interest earned and interest paid and therefore the assessee will be eligible for the deduction of interest out of the interest earned on such investment. Therefore we find no infirmity in the order of the CIT(A), therefore we confirm the order passed by the CIT(A) and the appeal preferred by the revenue is dismissed.

Summary

Issues Involved:
1. Entitlement to claim of interest expenses under Section 57(iii) of the Income Tax Act, 1961.
2. Nexus between the interest paid on loan and the income earned from other sources.

Issue-wise Detailed Analysis:

1. Entitlement to claim of interest expenses under Section 57(iii) of the Income Tax Act, 1961:

The revenue appealed against the order of the CIT(A) allowing the assessee to claim interest expenses of Rs. 52,48,337 under Section 57(iii) of the Income Tax Act, 1961. The revenue argued that the assessee sought to derive double benefits by claiming exemption under Section 54EC for capital gains and simultaneously claiming deduction under Section 57(iii) for interest paid on a loan taken to invest in 54EC bonds. The assessee contended that the interest expense was justified and allowable under Section 57(iii) because the loan was taken to purchase bonds, which generated taxable interest income.

2. Nexus between the interest paid on loan and the income earned from other sources:

The revenue argued there was no direct or indirect nexus between the interest expenditure and the income declared under other sources. According to the revenue, Section 57(iii) requires that the expenditure be incurred wholly and exclusively for earning the income. They contended that the loan was taken to avail exemption under Section 54EC, not for earning interest income. The assessee countered that the loan was taken due to a shortfall in funds resulting from deferred sale consideration of shares, and the borrowed funds were used to purchase bonds that generated interest income. The assessee maintained that this established a clear nexus between the interest paid on the loan and the interest earned from the bonds.

Detailed Analysis:

Background:

The assessee, an individual, filed a return declaring total income, including income from salaries and other sources. The assessment was completed with an addition of Rs. 52,48,337 due to disallowance of interest expenses. The assessee appealed to the CIT(A), which was initially dismissed ex-parte but later readjudicated in favor of the assessee upon remand by the Tribunal.

Revenue's Argument:

The revenue contended that the interest expense did not meet the criteria of Section 57(iii) as it was not incurred wholly and exclusively for earning interest income. They argued that the loan was taken to avail exemption under Section 54EC, not for making an interest-bearing investment.

Assessee's Argument:

The assessee argued that the loan was taken to cover a shortfall in funds due to deferred sale consideration of shares, and the borrowed funds were used to purchase bonds that generated interest income. The assessee claimed that this established a clear nexus between the interest paid on the loan and the interest earned from the bonds, making the interest expense deductible under Section 57(iii).

Tribunal's Findings:

The Tribunal noted that the assessee had invested borrowed funds in bonds and earned interest thereon. They referenced a similar case involving another promoter and director of the same company, where the Tribunal allowed the deduction of interest paid on a loan used to purchase bonds. The Tribunal found that the loan was taken wholly and exclusively for purchasing bonds, establishing a clear nexus between the income earned and the expenditure incurred. They concluded that the interest expense was allowable under Section 57(iii) and upheld the CIT(A)'s order.

Conclusion:

The Tribunal dismissed the revenue's appeal, confirming that the assessee was entitled to claim the interest expenses under Section 57(iii) of the Income Tax Act, 1961. The Tribunal emphasized the clear link and nexus between the interest earned on the bonds and the interest paid on the loan, making the expenditure deductible.

Order:

The appeal preferred by the revenue was dismissed, and the order was pronounced in the open court on 09.05.2014.