2022 (2) TMI 662 - AT - Income Tax

Revision u/s 263 by CIT - Deduction claimed in respect of interest paid on loan borrowed from HSBC Invest Direct Financial Services India Ltd., against the interest received from the CGDA scheme deposit was not proper and the AO ought to have disallowed the same. Accordingly the AO had failed to examine this aspect and had allowed the claim without inquiring into the same - extent of enquiry which was made by the AO while framing the assessment - HELD THAT - In the present case, there is no full enquiry on the impugned issues. The AO has accepted the claim of assessee which is not correct as seen from the facts of the case. The claim of set off of interest by the assessee is not examined by the AO in proper perspective. Being so, the order passed by the AO on an incorrect assumption of facts and incorrect appreciation of law without applying the correct principles of law and without making full enquiry, the order being erroneous insofar as it is prejudicial to the interests of revenue, the PCIT rightly assumed jurisdiction u/s. 263 . Interest incurred to be allowed as a deduction u/s. 57(iii) out of interest earned from mutual funds - In this case, the assessee received the sale consideration on sale of shares. The sale consideration was used for purchase of mutual funds - For making deposit under CGDA Scheme, the assessee has taken loan from HSBC Bank and paid interest thereon. The interest paid on loan has been claimed as deduction out of interest received from fixed deposit parked under CGDA Scheme u/s 57(iii) In the present case, the borrowings were made by the assessee to deposit in the CGDA Scheme so as to avail the benefit u/s. 54F of the Act. The assessee has paid interest on the loan availed for the purpose of making investment in CGDA scheme. The assessee used the sale consideration receive on sale of shares in mutual funds and earned interest out of it. The assessee wants to set off the interest paid on loan amount out of interest income received from mutual funds. As seen from the above, the borrowings are not made to make investment in the mutual fund and earn interest therefrom. The borrowed amount was used to make investment in CGDA scheme. The interest income was received by the assessee from mutual funds only was totally independent of the borrowings. The interest expenditure is incurred not for the purpose of earning income, but it is on the borrowings used for investment in CGDA scheme. In our opinion, unless funds are borrowed for making deposit to earn interest income, such interest paid on borrowings cannot be allowed as deduction in the computation of income from other sources, which in this case, is interest earned from mutual funds. In the facts stated above, there is no doubt that the funds borrowed from HSBC Bank was never used for investment to earn interest income. On the other hand, it has been used to make investment in CGDA Scheme and interest paid on borrowings cannot be set off against interest earned from mutual funds, as borrowed fund is not converted into mutual fund which yielded interest income. Therefore, in our opinion, there is no merit in the arguments of the assessee that interest incurred is to be allowed as a deduction u/s. 57(iii) of the Act out of interest earned from mutual funds which was taxed under the head income from other sources . Accordingly, the grounds of the assessee on this issue are rejected the appeal is dismissed.

Summary

Issues Involved:
1. Whether the assessment order passed under section 143(3) of the Income-tax Act, 1961 can be regarded as erroneous and prejudicial to the interest of Revenue for invoking the provisions of section 263.
2. Whether the interest paid on the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd. can be allowed as a deduction under section 57(iii) of the Act against the interest income earned from deposits made in the Capital Gains Deposit Account Scheme (CGDA Scheme).

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Assessment Order under Section 263:

The Principal Commissioner of Income-tax (PCIT) issued a notice under section 263 of the Act, proposing to revise the assessment order passed under section 143(3) on the grounds that it was erroneous and prejudicial to the interest of the revenue. The PCIT contended that the Assessing Officer (AO) failed to disallow the deduction claimed by the assessee for interest paid on a loan borrowed from HSBC Invest Direct Financial Services [India] Ltd. against the interest received from the CGDA scheme deposit. The PCIT argued that the AO allowed the claim without proper inquiry.

The assessee objected, stating that the AO had examined the deduction claimed under section 57 of the Act and allowed it after verifying the nexus between the borrowed funds and the investment in the CGDA Scheme. The assessee argued that the AO made a proper inquiry and applied his mind before allowing the deduction, thus the assessment order should not be regarded as erroneous or prejudicial to the interest of the revenue.

The Tribunal found that the AO had issued notices under section 142(2) and section 142(1) asking for detailed information regarding the loan and the fixed deposits. The assessee had provided the necessary details and evidence, which the AO considered before allowing the deduction. Therefore, the Tribunal concluded that the AO had made a proper inquiry and the assessment order was not erroneous or prejudicial to the interest of the revenue. The Tribunal quashed the order passed by the PCIT under section 263.

2. Deduction of Interest Paid under Section 57(iii):

On the merits, the assessee claimed that the interest paid on the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd. should be allowed as a deduction under section 57(iii) of the Act against the interest income earned from deposits made in the CGDA Scheme. The assessee argued that there was a clear and direct nexus between the borrowed funds and the fixed deposits made in the CGDA Scheme, and therefore, the interest paid on the loan should be deductible.

The PCIT, however, held that the sale consideration received on the transfer of shares should be deemed to have been invested in the CGDA Scheme, and the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd. should be deemed to have been invested in mutual funds. The PCIT argued that there were no statutory provisions allowing such deeming fiction, and therefore, the interest paid on the loan could not be allowed as a deduction.

The Tribunal agreed with the PCIT's view, stating that the borrowings were made to deposit in the CGDA Scheme to avail the benefit under section 54F of the Act. The sale consideration was used to purchase mutual funds, and the interest income from mutual funds was independent of the borrowings. The Tribunal held that the interest paid on the loan could not be set off against the interest earned from mutual funds, as the borrowed funds were not used to earn the interest income. The Tribunal cited various case laws to support its decision, including Karnataka Forest Plantations Corpn. Ltd. v. CIT, 156 ITR 275 (Kar) and Smt. Padmavathi Jaikrishna v. Addl. CIT, 166 ITR 176 (SC).

The Tribunal concluded that the interest incurred on the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd. could not be allowed as a deduction under section 57(iii) of the Act against the interest earned from mutual funds. Accordingly, the Tribunal dismissed the appeals of the assessees.

Conclusion:

The Tribunal held that the assessment order passed under section 143(3) was not erroneous or prejudicial to the interest of the revenue, and therefore, the PCIT's order under section 263 was quashed. However, on the merits, the Tribunal upheld the PCIT's view that the interest paid on the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd. could not be allowed as a deduction under section 57(iii) against the interest earned from mutual funds. The appeals of the assessees were dismissed.