2021 (1) TMI 915 - AT - Income Tax

Revision u/s 263 - deduction of interest expenditure against the interest income was not in accord with the provisions of Sec. 57 - PCIT was of the view that allowing of the same by the A.O without verifying the records had rendered the order passed as erroneous in so far it was prejudicial to the interest of the revenue - HELD THAT - At the first blush the claim of the assessee for setting off the interest paid on the loan raised (on security of the FDR s) against the interest received on FDR s appeared to be very convincing. However, we find that the issue is no more res integra and had been settled by the Hon ble Supreme Court in CIT Vs. Dr. V.P Gopinathan 2001 (2) TMI 10 - SUPREME COURT wherein had held, that interest on loan taken by the assessee from the bank on security of fixed deposit could not be reduced from his income by way of interest on the fixed deposit placed by him in the bank. In our considered opinion, the view taken by the PCIT in the case before us is absolutely in conformity with the aforesaid judgment of the Hon ble Apex Court. Accordingly, finding ourselves in agreement with the view taken by the PCIT that the A.O had wrongly allowed the assessee s claim for deduction of the interest paid on the loans against the interest received on the FDR s, we uphold the order passed by him under Sec. 263 of the Act. - Decided against assessee.

Issues Involved:
1. Validity of the revision of the assessment order under Section 263 of the Income Tax Act, 1961.
2. Deductibility of interest expenditure under Section 57(iii) of the Income Tax Act, 1961.
3. Assessment of gross versus net interest income.
4. Jurisdictional overreach by the Principal Commissioner of Income Tax (PCIT).

Issue-wise Detailed Analysis:

1. Validity of the Revision of the Assessment Order under Section 263 of the Income Tax Act, 1961:
The appellant challenged the revision of the assessment order dated 21.11.2017 by the PCIT under Section 263, arguing that the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The appellant contended that the case was selected for scrutiny specifically for the issue of deduction from Income from other sources, and the Assessing Officer (A.O) had duly considered the submissions and judicial precedents before passing the order. Therefore, the appellant argued that the revision was bad in law.

2. Deductibility of Interest Expenditure under Section 57(iii) of the Income Tax Act, 1961:
The appellant claimed a deduction of ?48,14,940/- paid as interest on a loan against the interest income of ?51,03,256/- received on Fixed Deposit Receipts (FDRs), offering the net balance amount of ?2,88,316/- for tax under Section 56. The PCIT observed that the deduction of the interest expenditure against the interest income was not in accord with the provisions of Section 57 of the Act. The appellant argued that there was a direct nexus between earning and payment of interest, and the expenditure was wholly and exclusively for the purpose of making or earning the interest income, thus making the deduction tenable under Section 57(iii).

3. Assessment of Gross versus Net Interest Income:
The PCIT held that the assessee should be assessed on the gross amount of interest received on the FDRs and that no deduction of the interest paid on the loan taken against the security of the FDRs was permissible under law. The appellant contended that the A.O had made detailed inquiries and had accepted the claim for deduction after due verification, thus the assessment order could not be termed erroneous or prejudicial to the interest of the revenue.

4. Jurisdictional Overreach by the Principal Commissioner of Income Tax (PCIT):
The appellant argued that the PCIT had exceeded his jurisdiction by revising the well-reasoned order passed by the A.O. The appellant relied on judicial pronouncements, including the judgment of the Hon'ble Supreme Court in Hero Cycles Pvt. Ltd. Vs. CIT, to support the contention that the PCIT could not justifiably claim to decide the reasonableness of the expenditure.

Judgment Analysis:

1. Validity of the Revision:
The tribunal held that the PCIT was justified in exercising his revisional jurisdiction under Section 263 as the A.O had failed to make necessary verifications regarding the assessee’s claim for deduction of the interest paid on loans against the interest received on FDRs.

2. Deductibility of Interest Expenditure:
The tribunal referred to the judgment of the Hon'ble Supreme Court in CIT Vs. Dr. V.P Gopinathan, which held that interest on a loan taken against the security of a fixed deposit could not be reduced from the interest income on the fixed deposit. Therefore, the tribunal agreed with the PCIT that the deduction claimed by the assessee was not permissible under Section 57(iii).

3. Assessment of Gross versus Net Interest Income:
The tribunal upheld the PCIT's view that the assessee should be assessed on the gross interest income received on the FDRs. The tribunal found that the A.O had erred in allowing the deduction of the interest paid on the loans against the interest received on the FDRs, thus rendering the assessment order erroneous and prejudicial to the interest of the revenue.

4. Jurisdictional Overreach:
The tribunal concluded that the PCIT had not exceeded his jurisdiction and had rightly exercised his revisional powers under Section 263. The tribunal dismissed the appellant's contention that the PCIT had dislodged a well-reasoned order passed by the A.O.

Conclusion:
The tribunal dismissed the appeal of the assessee, upholding the order passed by the PCIT under Section 263 of the Income Tax Act, 1961. The tribunal found no infirmity in the PCIT's decision to set aside the assessment order and direct the A.O to frame a de novo assessment in accordance with the law. The grounds of appeal raised by the assessee were dismissed, and the appeal was pronounced in the open court on 22.01.2021.

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