2018 (10) TMI 918 - AT - Income Tax

Disallowing the deduction of Interest paid on overdraft facility claimed by the appellant from Interest earned on FDR u/s 57(iii) - Held that - There is no dispute that the assessee purchased FD of ₹ 12 crores out of interest free loan from one trustee, namely, Dr Mrs Vimla Lal. There is no dispute that the assessee availed overdraft facility against the said FD and utilised the borrowing towards purchase of shares of a group company. In our considered opinion, the assessee had two options, viz., the assessee could have liquidated the FD and utilised the amount towards purchase of shares of group company and, secondly, the assessee could have taken over draft the FD and utilised the funds towards the purchase of shares of group company. The assessee opted for second option. The source of interest earning remained intact. In doing so, the assessee had to incur interest expenditure on overdraft. The source of income and application of income is same, i.e. FD. Therefore, in our considerate view, netting off of interest has to be allowed to the assessee. Our view is also fortified by the judgment in the case of ACG Associated Capsules P Ltd 2012 (2) TMI 101 - SUPREME COURT OF INDIA . Ground No. 1 is accordingly allowed. Disallowance of short term capital loss - Held that - It is true that the assessee accepted the shares of M/s Varun Industries Ltd as security against the loan given to Swati Rajesh Shah. It is equally true that the assessee has nothing to do with the profits /losses in the sale of shares of M/s Varun Industries Ltd. If the sale transactions would have resulted into gain, we are certain that the assessee would not have paid the tax on the gains on the plea that the gain belongs to Swati Rajesh Shah. By the same analogy, any loss on sale of shares belong to Swati Rajesh Shah and the assessee has been rightly denied claim of loss.

Summary

Issues:
1. Disallowance of deduction of interest paid on overdraft facility against interest earned on Fixed Deposits.
2. Disallowance of Short term Capital Loss on the sale of shares.

Analysis:

Issue 1: Disallowance of deduction of interest paid on overdraft facility against interest earned on Fixed Deposits:
The appellant, a trust, filed its return for the assessment year 2013-14. During scrutiny, it was noted that the appellant earned interest on Fixed Deposits but also paid interest on overdraft facilities. The Assessing Officer (AO) disallowed the deduction of interest expenses against the interest received, taxing the entire interest income. The appellant contended that the overdraft was taken to avoid premature encashment of Fixed Deposits, maintaining a regular source of income. The Commissioner of Income Tax (Appeals) upheld the AO's decision. However, the Tribunal allowed the appeal, citing that the source of interest earning remained intact despite incurring interest expenditure on the overdraft. The Tribunal relied on legal precedents, including the judgment of the Hon'ble Supreme Court, to support its decision, allowing the netting off of interest and overturning the disallowance.

Issue 2: Disallowance of Short term Capital Loss on the sale of shares:
The appellant lent a sum to an individual who purchased shares of a company, pledging them as security. The appellant later sold the shares at a loss, claiming it as a short term capital loss. The Tribunal noted that the appellant had no involvement in the profits or losses from the share sales. It held that if gains had been realized, the appellant would not have paid tax on them, indicating that losses should also be attributed to the individual who owned the shares. Consequently, the claim for short term capital loss was denied, upholding the decision of the lower authorities.

In conclusion, the Tribunal partly allowed the appeal, overturning the disallowance of interest deduction against Fixed Deposit interest but upholding the denial of short term capital loss claim on the sale of shares.