2017 (4) TMI 771 - HC - Income Tax

Disallowance of interest - interpretation of Section 57 (iii) - Held that - In the facts of this case, it is evident that the purpose for creating the FD was solely to secure the loan that the assessee obtained and not for the purpose of earning interest as is insisted upon under Section 57. Interest income out of the FDRs made with the bank - Held that - The Court is of the opinion that the ITAT s view that since the last transaction, i.e., borrowing to the tune of ₹ 7.2 crores could not be doubted, the addition made was not permissible, is correct.

Issues:
1. Disallowance of interest by the ITAT under Section 57 (iii) of the Income Tax Act, 1961.
2. Claim for deduction of interest payment against interest income on fixed deposit made for business purposes.
3. Interpretation of Section 57 (iii) in relation to business expenditure and netting/set off.
4. Validity of disallowance of interest by the AO without proper justification.
5. Applicability of Supreme Court decisions in Commissioner of Income Tax v. Dr. V.P. Gopinathan and CIT v. Delhi Brass & Metal Works Limited.
6. Purpose of creating fixed deposit solely for securing a loan.
7. Question regarding a sum of ?1.3 crores and the correctness of ITAT's view.
8. Issue of furnishing inaccurate particulars favoring the assessee.

Analysis:

1. The High Court addressed the issue of disallowance of interest by the ITAT under Section 57 (iii) of the Income Tax Act, 1961. The appellant had borrowed capital for business from a bank and deposited an amount in a fixed deposit to secure the advance. The ITAT disallowed the claim for netting and interest set off, leading to the entire amount being disallowed. However, the CIT (A) accepted the plea of the assessee, emphasizing that the fixed deposits were made for business purposes and the assessee was eligible for the deduction of interest payment against the interest income.

2. The Court considered the interpretation of Section 57 (iii) concerning business expenditure and netting/set off. The Revenue argued that the assessee could only claim deduction on the permissible head enumerated in Section 57 (iii) for expenditure incurred exclusively for earning such income. The Court analyzed previous decisions and highlighted that the purpose of creating the fixed deposit was solely to secure the loan, not for earning interest as required by Section 57.

3. The Court also discussed the validity of the disallowance of interest by the AO without proper justification. It noted that the CIT (A) and ITAT's findings were in favor of the assessee, and no substantial question of law arose from the disallowance. The Court dismissed the appeals accordingly.

4. Regarding the sum of ?1.3 crores, the Court found that the ITAT's view was correct, as the borrowing amount could not be doubted, and no question of law arose on this aspect. The Court affirmed the concurrent fact-based findings of the ITAT.

5. The Court examined the applicability of Supreme Court decisions in Commissioner of Income Tax v. Dr. V.P. Gopinathan and CIT v. Delhi Brass & Metal Works Limited. It differentiated the facts of the present case from those in the cited cases and concluded that the purpose of creating the fixed deposit was primarily for securing the loan, not for earning interest as required by Section 57.

6. Additionally, the Court addressed the issue of furnishing inaccurate particulars favoring the assessee. It determined that no substantial question of law arose from the findings of the CIT (A) and ITAT on this matter and dismissed the appeal accordingly.

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