2022 (2) TMI 704 - 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 Assessing Officer ought to have disallowed the same - 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 claimed 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 was erroneous and prejudicial to the interest of the revenue, warranting revision under section 263.
2. Whether the interest expenditure incurred on the loan taken from HSBC Invest Direct Financial Services [India] Ltd. was allowable 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 argued that the Assessing Officer (AO) failed to properly examine the deduction claimed for interest paid on a loan from HSBC Invest Direct Financial Services [India] Ltd. against the interest received from the CGDA Scheme deposit. The PCIT contended that the AO allowed the claim without adequate inquiry.

The appellant (assessee) contended that the AO had indeed examined the deduction claimed under section 57 of the Act during the assessment proceedings. The assessee provided detailed submissions and documentary evidence establishing the nexus between the borrowed funds and the investment in the CGDA Scheme. The AO, after due verification, allowed the deduction, indicating proper application of mind. Therefore, the assessment order could not be deemed erroneous or prejudicial to the revenue's interest.

The Tribunal noted that the PCIT can initiate revision proceedings under section 263 if the AO's order is erroneous and prejudicial to the revenue's interest. The AO’s inquiries and verifications during the assessment proceedings were found to be adequate. Therefore, the Tribunal concluded that the PCIT erred in invoking section 263, as the conditions for treating the assessment order as erroneous were not met. The Tribunal relied on precedents such as Malabar Industrial Co. Ltd. v. CIT and Max India Ltd., which emphasize that an order cannot be revised merely because the PCIT has a different opinion.

2. Allowability of Interest Expenditure under Section 57(iii):

On the merits, the Tribunal examined whether the interest expenditure of ?49,11,102 incurred on the loan taken from HSBC Invest Direct Financial Services [India] Ltd. was allowable as a deduction under section 57(iii) of the Act against the interest income earned from the CGDA Scheme deposits.

The assessee argued that the loan was taken to make a deposit in the CGDA Scheme, which was necessary to claim exemption under section 54F of the Act. The assessee contended that without the loan, the deposit and the resulting interest income would not have been possible. Therefore, the interest expenditure should be deductible under section 57(iii).

The Tribunal, however, found that the borrowed funds were used to make the deposit in the CGDA Scheme, not to earn interest income from mutual funds. The interest income from mutual funds was independent of the borrowings. The Tribunal emphasized that for a deduction under section 57(iii), the expenditure must be incurred wholly and exclusively for earning the income. Since the borrowings were not made to earn the interest income from mutual funds, the interest expenditure could not be set off against the interest income received from mutual funds.

The Tribunal referred to several judicial precedents, including Karnataka Forest Plantations Corpn. Ltd. v. CIT and Smt. Padmavathi Jaikrishna v. Addl. CIT, which support the view that unless funds are borrowed specifically to earn interest income, the interest paid on such borrowings cannot be deducted under section 57(iii).

Conclusion:

The Tribunal concluded that the assessment order was not erroneous or prejudicial to the revenue's interest, and therefore, the PCIT's invocation of section 263 was not justified. On the merits, the Tribunal held that the interest expenditure incurred on the loan taken from HSBC Invest Direct Financial Services [India] Ltd. was not allowable as a deduction under section 57(iii) against the interest income from mutual funds. Consequently, the appeal of the assessee was dismissed.