2015 (3) TMI 793 - AT - Income Tax

Deduction u/s 36(1)(viii) disallowed - computation of deduction under Chapter VI-A - Nexus with income chargeble as income from other sources - nexus of investment in such bonds with the interest bearing or interest free bonds - CIT(A) restored the deduction u/s 36(1)(viii) to the amount as claimed by the assessee - case of the Revenue is that since the amount of Reserves and surplus appearing in the assessee s balance sheet is more than the investment made in the UP State Bonds, etc. which fetched interest income of ₹ 10.41 crore, and the amount of interest bearing advances being more than the interest bearing loans, the presumption should be drawn that such investments were financed by the assessee out of its capital and reserves and not from any interest bearing funds. And as such, the claim for deduction of interest and other charges amounting to ₹ 145.66 crore is untenable. Held that - There is no discussion in the assessment or the impugned order as to the nexus of investment in such bonds with the interest bearing or interest free bonds. The AO has gone with the figures of the current year to hold that interest bearing advances are more than the interest bearing loans. On the other hand, the contention of the assessee is that investment in such bonds were made in earlier years and that too out of interest bearing funds. The ld. CIT(A) has simply held that since deductions under Chapter VI-A are to be done on net basis, the assessee deserves relief. He failed to note that the question under consideration was not about the calculation of the amount of deduction under Chapter VI-A, but the computation of income under the head Income from other sources , for which there is a separate scheme set out in Chapter IV-F of the Act. Under such circumstances, we cannot sustain the view canvassed by the ld. CIT(A). Accordingly, the impugned order is set aside and the matter is sent back to the AO for deciding this issue afresh to find out the source of the amount invested in such funds, at the time when such investments were made. - Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Deduction under Section 36(1)(viii) of the Income Tax Act.
2. Allocation of interest and other charges towards earning 'Income from other sources'.
3. Determination of the source of funds for investments in bonds.

Detailed Analysis:

1. Deduction under Section 36(1)(viii) of the Income Tax Act:
The assessee, a company engaged in providing housing loans, claimed a deduction of Rs. 8,14,50,000 under Section 36(1)(viii) for the assessment year 2008-09. The computation included business income before the deduction, the ratio of interest on long-term housing loans to total interest on housing loans, and the profit from long-term housing loans. The Assessing Officer (AO) recalculated the deduction, reducing it to Rs. 6,86,77,443, resulting in a disallowance of Rs. 1,27,72,557. The Commissioner of Income Tax (Appeals) [CIT(A)] restored the deduction claimed by the assessee. The Revenue appealed against this decision.

2. Allocation of Interest and Other Charges:
The AO observed that the assessee allocated Rs. 145,66,55,679 as 'Interest and other charges' towards earning 'Income from other sources', which included interest income from long-term investments in various bonds. The AO found that the 'Reserves and surplus' in the balance sheet were more than the investments made in these bonds, implying that the investments were made from interest-free funds. Consequently, the AO disallowed the deduction of interest and other charges from the interest income on investments.

3. Determination of the Source of Funds for Investments in Bonds:
The AO and the CIT(A) differed on whether the investments in bonds were made from interest-bearing funds or interest-free funds. The AO assumed that the investments were made from reserves and surplus, whereas the assessee contended that the investments were made in earlier years from interest-bearing funds. The Tribunal noted that there was no clear discussion on the nexus between the investments and the source of funds. The Tribunal emphasized that under Section 57(iii) of the Act, interest expenditure can be allowed as a deduction if the investments are made from interest-bearing loans.

Judgment:
The Tribunal set aside the CIT(A)'s order and remitted the matter back to the AO for a fresh decision. The AO was directed to determine the source of funds for the investments in bonds at the time they were made. If the investments were found to be made from interest-bearing funds, the assessee's claim for deduction of interest and other charges should be allowed. Otherwise, the Revenue's stand of disallowing the deduction should be upheld.

Conclusion:
The appeals for the assessment years 2006-07, 2007-08, and 2008-09 were allowed for statistical purposes, with the AO directed to re-examine the source of funds for investments in bonds and determine the allowable deductions accordingly. The order was pronounced in the open court on 12.03.2015.