2016 (11) TMI 743 - AT - Income Tax

Income from other sources - deduction on account of interest incurred/payable to the banks from the interest income - Held that - We find clear cut nexus between the interest earned from NSE on deposits with National Stock Exchange out of bank guarantees invoked and proceeds of FDRs and interest incurred on the sources of funds which are from the various banks out of the interest bearing funds given to NSE in the form of the bank guarantees invoked in year 2002 and FDRs with lien in favour of NSE on which the lien was exercised in 2002. We find merit in the arguments of the ld.AR that the interest incurred to these banks namely Global Trust Bank and Centurion Bank ICICI Bank should be allowed while assessing the interest income of the assessee from the deposits with NSE and we are not convinced with the findings of ld.CIT(A) that there is no nexus between the funds/deposits lying with the NSE under lien and NSE have various deposits or FDR under lien or deposits out of sources as discussed supra and the interest expense accrued in favour of various banks on the money borrowed for the purpose of FDRs for security and also for bank guarantees to NSC. Accordingly we set aside the order of ld.CIT(A) and direct the AO to allow deduction of interest of 2, 74, 88, 000/- out of the interest received from the National Stock Exchange. Non allowance of credit of tax - rectification application - Held that - e find that the assessee has not been allowed credit being TDS at source on behalf of the assessee by NSE/Banks and the ld. CIT(A) has just dismissed the ground by directing the assessee to file rectification application u/s 154 of the Act which is not correct in our view and hence we are of the view that it would meet ends of justice if the AO is directed to allow the credit of TDS after verifying the claim of the assessee after allowing reasonable opportunity of being heard to the assessee. Depreciation claim - Held that - We find that the assessee has discontinued the business following the order of SEBI and therefore there was no activity during the year and the claim of the depreciation cannot be allowed as the assessee did not carry out any business activity. However the assessee is free to claim deprecation in the year in which the business is re-commenced on the basis of Written Down Value in the year in which the business was discontinued.

Summary

Issues Involved:
1. Disallowance of loss on valuation of stocks.
2. Disallowance of financial costs.
3. Deduction of interest incurred/payable to banks from interest income earned.
4. Non-allowance of credit of tax deducted at source (TDS).
5. Disallowance of depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Valuation of Stocks:
The ground regarding the disallowance of loss of ?3,328 on the valuation of stocks was not pressed by the assessee and was accordingly dismissed.

2. Disallowance of Financial Costs:
The first part of the ground concerning the confirmation of disallowance of financial costs amounting to ?8,59,63,585 was also not pressed by the assessee and was dismissed.

3. Deduction of Interest Incurred/Payable to Banks from Interest Income Earned:
The assessee argued that interest incurred on borrowed funds, which were used to provide securities and guarantees to the National Stock Exchange (NSE), should be deductible from the interest income earned from NSE. The Assessing Officer (AO) had disallowed these expenses, assessing the total interest income of ?5,43,92,821 under "Income from Other Sources" without allowing deductions for the interest incurred. The CIT(A) upheld this decision, stating there was no nexus between the interest earned and the interest incurred. However, upon review, the Tribunal found a clear nexus between the borrowed funds (used for FDRs and bank guarantees) and the interest earned from NSE. Therefore, the Tribunal directed the AO to allow the deduction of interest incurred amounting to ?2,74,88,000 from the interest income received from NSE under section 57(iii) of the Income Tax Act.

4. Non-allowance of Credit of Tax Deducted at Source (TDS):
The assessee contended that the AO did not allow credit for TDS amounting to ?38,79,584. The CIT(A) had dismissed this ground, suggesting the assessee file a rectification application under section 154 of the Act. The Tribunal directed the AO to verify the assessee's claim and allow the credit of TDS after providing a reasonable opportunity for the assessee to be heard.

5. Disallowance of Depreciation:
The CIT(A) had disallowed the depreciation claim of ?1,79,634 on the grounds that the assessee’s business had ceased following SEBI’s order. The Tribunal upheld this decision, noting that since there was no business activity during the year, the depreciation could not be allowed. However, the assessee was permitted to claim depreciation in the year the business recommences, based on the Written Down Value at the time of discontinuation.

Appeal for Assessment Year 2009-10:
The Tribunal applied the same decisions and reasoning from the assessment year 2008-09 to the appeal for the assessment year 2009-10.

Conclusion:
The appeals filed by the assessee were partly allowed, with specific directions for the AO to allow deductions and credits as per the Tribunal's findings. The order was pronounced in the open court on 25.08.2016.