2015 (11) TMI 420 - AT - Income Tax

Sale of shares - LTCG or STCG - Held that - Taking a consistent view The assessee is an investor not engaged in the business of sale purchase of shares and mutual funds. The question is accordingly decided against the Revenue both assessment year. The Assessing Officer is directed to treat her income from sale of shares and mutual funds in the two assessment years as short term capital gains and pass a consequential order. - Decided in favour of assessee. Disallowance of interest - CIT(A) allowed the claim - Held that - There is no dispute with regard to the position of law that the expenditure not being in the nature of capital expenditure made out or extended wholly or exclusively for the purpose of earning interest income is allowable for deduction u/s.57 of the Act. The contentions of the assessee is that the interest paid to the banks in respect of over draft accounts was extended wholly and exclusively for the purpose of earning of the interest income. Therefore, it was required to be allowed. On the contrary, the Assessing Officer disallowed the claim on the basis that the facilities were not used for making investment in FD and sum was not wholly or exclusively for the purpose of earning of interest income of FDs. On the contrary, the ld. CIT(A) had given the finding that so far interest paid on bank overdraft with HSBC Bank, ICICI Bank and, PNB. The nexus has been established between the interest paid and interest earned. Therefore, we do not see any reason to interfere into this finding of ld. CIT(A). This ground of Revenue s appeal is rejected. - Decided in favour of assessee. Disallowance of deduction of total outgo for interest - Held that - The assessee has demonstrated through accounts that the FD and OD facility was utilized for the purpose of making FDs only. Under these facts, we are of the considered view that the assessee is entitled for deduction of the interest income. Moreover, in the light of ratio laid down by the Hon ble Apex Court in case of Keshavji Ravji & Co. vs. CIT (1990 (2) TMI 1 - SUPREME Court) and Hon ble Gujarat High Court in case of CIT vs. Wintex Mills Ltd.(1999 (9) TMI 24 - GUJARAT High Court ), on the basis of principle of netting, the assessee was entitled for deduction in respect of the interest paid on overdraft account. Therefore, we hereby direct the Assessing Officer to delete the disallowance - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of income from the sale of shares as either capital gains or business income.
2. Deduction of interest expenditure related to overdraft accounts against interest income from fixed deposits.
3. Verification and allowance of interest expenditure claims.

Detailed Analysis of the Judgment:

1. Classification of Income from Sale of Shares:
The primary issue revolves around whether the income from the sale of shares should be classified as capital gains or business income. The Assessing Officer (AO) had treated both long-term capital gains (Rs. 19,59,688) and short-term capital gains (Rs. 13,90,773) from the sale of shares as business income, arguing that the shares were trading assets. The CIT(A) and the Tribunal, however, directed the AO to treat these incomes as capital gains, following the precedent set in the case of Shri Sugamchand C. Shah. The Tribunal concluded that the assessee was an investor and not engaged in the business of trading shares, thereby affirming the CIT(A)'s decision to classify the income as long-term and short-term capital gains, respectively.

2. Deduction of Interest Expenditure:
The second issue pertains to the deduction of interest expenditure on overdraft accounts against the interest income earned from fixed deposits (FDs). The AO disallowed a deduction of Rs. 20,28,945 claimed by the assessee, arguing that there was no demonstrated nexus between the interest income earned and the expenditure incurred. The CIT(A), however, allowed a partial deduction of Rs. 13,85,842, subject to verification. The Tribunal upheld the CIT(A)'s decision, finding that the interest paid on overdraft accounts was indeed for the purpose of earning interest income from FDs. The Tribunal relied on the principle of netting, as established by the Supreme Court in Keshavji Ravji & Co. vs. CIT and the Gujarat High Court in CIT vs. Wintex Mills Ltd., to allow the deduction.

3. Verification and Allowance of Interest Expenditure Claims:
The third issue involves the verification and allowance of the interest expenditure claimed by the assessee. For the assessment year 2008-09, the CIT(A) had directed the AO to allow an interest expenditure of Rs. 19,37,686 after verifying the nexus between the overdraft accounts and the fixed deposits. The Tribunal affirmed this decision, noting that the CIT(A) had personally verified the bank accounts and found a direct nexus between the interest income on fixed deposits and the interest expenditure on overdraft accounts. The Tribunal found no reason to interfere with the CIT(A)'s findings, thereby upholding the allowance of the interest expenditure.

Conclusion:
The Tribunal dismissed the Revenue's appeals and allowed the assessee's cross-objection, affirming the CIT(A)'s decisions on all counts. The income from the sale of shares was correctly classified as capital gains, and the interest expenditure related to overdraft accounts was rightfully allowed as a deduction against the interest income from fixed deposits, subject to verification. The Tribunal's judgment aligns with established precedents and principles of netting interest income and expenditure.