2006 (3) TMI 205 - AT - Income Tax

Interest paid on the borrowed funds - HELD THAT - We find that according to section 14A no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act for the purpose of computing total income under this Chapter. Meaning thereby if any expenditure is incurred on borrowed funds which do not earn any income the said expenditure are not to be allowed as deduction in computing total income of the assessee. In the instant case the assessee has borrowed funds to make an investment in the firm under its capital account. As per the partnership deed the assessee is not entitled for any interest on its capital balance as there was no provision in the partnership deed to this effect. Whatever remuneration was earned by the assessee being a partner it was on account of services rendered by him for the firm and not on account of investment made by him in the firm. Unless and until the nexus is established between the borrowed funds and the income of the assessee the deduction of the interest paid on the borrowed funds would not be allowed against the income. In the instant case since no nexus was established between the borrowed funds and remuneration earned by the assessee the Assessing Officer was justified in disallowing the interest paid on the borrowed funds. We therefore find no infirmity in the order of the CIT(A). Unexplained investment u/s 69 - HELD THAT - According to assessee the gold ornaments were sold on 2-7-1997 and tax was deposited on 3-7-1997 much before the filing of the declaration i.e. on 5-9-1997. Under these circumstances we find no force in the contention of the assessee that taxes were paid out of the sale proceeds of part of gold ornaments declared in the VDIS Scheme. We accordingly find ourselves in agreement with the observation of the lower authorities that the taxes determined on the VDIS on declared amount was paid out of undisclosed source by the assessee. We therefore find no infirmity in the order of the CIT(A) who has rightly adjudicated the issue in the light of the material available on record. Accordingly the order of the CIT(A) is hereby confirmed. In the result the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of interest claimed as a deduction.
2. Addition as unexplained investment under section 69 of the Income-tax Act, 1961.
3. Disallowance of Long-Term Capital Loss on the sale of jewellery disclosed under VDIS, 1997.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Claimed as Deduction:
The assessee challenged the CIT(A)'s confirmation of the disallowance of Rs. 2,72,771/- as interest claimed as a deduction from the remuneration received from a registered firm. The Assessing Officer disallowed the interest paid on borrowed funds for two reasons: (i) The interest payment on interest-free loans advanced to the firm is covered under section 40A(2)(b) of the Act, and (ii) The borrowed funds were advanced to a business whose income is exempt in the hands of the assessee, invoking section 14A. The CIT(A) agreed with the Assessing Officer, stating that the interest expense incurred for investing in a firm, whose profit is exempt from tax, falls under section 14A. The Tribunal upheld the CIT(A)'s order, stating that without establishing a nexus between the borrowed funds and the income, the interest deduction cannot be allowed.

2. Addition as Unexplained Investment under Section 69:
The assessee disclosed jewellery under the VDIS, 1997, and sold part of it to pay VDIS tax. The Assessing Officer treated the jewellery sold on 2-7-1997, valued at Rs. 8,54,758/-, as unexplained investment under section 69, arguing that the jewellery sold could not be part of the jewellery declared later under VDIS. Despite the assessee's reliance on the VDIS certificate, the CIT(A) upheld the addition, citing a CBDT clarification. The Tribunal agreed, noting that the tax under VDIS should be paid from other sources, not from the sale of declared items, and upheld the addition as the assessee failed to explain the source of acquisition of the jewellery sold.

3. Disallowance of Long-Term Capital Loss:
The disallowance of Long-Term Capital Loss of Rs. 4,20,750/- on the sale of jewellery disclosed under VDIS was also contested. The Assessing Officer and CIT(A) rejected the capital loss claim, as the source of acquisition of the gold ornaments was not proven. The Tribunal upheld this disallowance, agreeing with the CIT(A)'s observation that the taxes paid under VDIS were from undisclosed sources, and thus, the capital loss claim was not justified.

Conclusion:
The Tribunal dismissed the appeal, confirming the CIT(A)'s orders on all grounds. The disallowance of interest, addition as unexplained investment, and disallowance of Long-Term Capital Loss were all upheld, with the Tribunal finding no infirmity in the CIT(A)'s adjudication based on the material on record.