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TMI Blog2017 (12) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009 - - - Dated:- 17-10-2017 - MR. P.R. RAMACHANDRA MENON AND SHIRCY V, JJ. For The Appellant : sri. E. K. Nandakumar, Sri.Preetha And Sri. ANIL D. Nair For The Respondent : Shri Jose Joseph JUDGMENT Whether the income obtained to the assessee by way of interest, by virtue of the amount advanced to a sister concern (admittedly an income from other sources coming within the purview of Section 56 of the Income tax Act) is liable to be set off against the interest paid by the assessee to his bankers in respect of a loan obtained for the export business (packing credit facility) as an eligible deduction under of the said Act is the point to be considered and answered by this Court. 2. On losing the battle before the Assessing Authority, the first Appellate Authority and also before the Income Tax Appellate Tribunal, the assessee has come up before this Court, raising two questions as substantial questions of law, in the following terms: 1. Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in disallowing the interest paid on bank loan, utilised for advancing to M/s. Capricon Shopping Complex from the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the revenue and after considering the rival submissions, the assessing authority held that the main object of the loan in respect of the Packing Credit Facility obtained by the assessee from the Bank was to facilitate export business. The diversion of part of the loan to another concern, in which the assessee had an interest, was not in connection with the export business and therefore, interest received on such diverted loan was taxable as 'income from other sources', to which he had no direct liability to pay any interest. Reliance was also placed on the law declared by the Supreme Court in Commissioner of Income Tax vs. Dr. V. P. Gopinathan [. It was accordingly, that the assessment was finalised fixing the total liability as ₹ 3,02948/- as per Annexure A order. 7. The matter was taken in appeal before the Commissioner of Income Tax (Appeals)Thiruvananthapuram. After hearing both the sides, the Appellate Authority repelled the contentions raised by the appellant and the appeal was dismissed confirming the assessment order as per Annexure B dated 17.08.2005. This led to further appeal before the Income Tax Appellate Tribunal, where the matter was arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of the assessee , there had to be close nexus between the two transactions, which has been analysed and found against the assessee, at all the three different levels. A concurrent fact adjudication has been done by the Assessing authority, Appellate authority and also by the Tribunal, and as such a further scrutiny is not possible in terms of Section 260A of the Act before this Court, as no substantial question of law is involved and that the position stands covered by the verdict passed by the Apex Court in Gopinathan's case (cited supra). The decisions sought to be relied on by the assessee in Rajendra Moody's case and that of the Delhi High Court in Vodaphone's case are not applicable, because of the difference in the factual context discussed by the Apex Court/Delhi High Court in the said cases. There was no dispute to the factual position discussed by the assessing/appellate authority/Tribunal and there was no case that a perverse finding on fact was there, so as to constitute a question of law. Gopinathan's case was cited and the assessing officer relied on the said case only to show that there was 'no nexus' between the two insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x ( iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. From the mandate of Section 57 of the Act, it is quite evident that the income chargeable under the head - income from other sources shall be computed after deducting any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income as stipulated under Section 57 (iii) of the Act. Whether this requirement is satisfied in the instant case or whether it can be inferred applying the judicial precedents cited across the bar to the given set of facts and circumstances, is the point to be looked into. 13. In so far as the verdict passed by the Apex Court in Rajendra Prasad Moody's case is concerned, it was pursuant to a reference made by the Tribunal to the Court under Section 256 of the IT Act, in view of a conflict in the decisions of the High Courts on the question as to whether interest on monies borrowed for investment in shares is an allowable expenditure under Section 57(iii) of the Act, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or promotion of their export business, for which interest was payable and it was being paid accordingly. The fact that a portion of the said loan was diverted to a sister concern, who was doing some other business, earning income by way of interest (though at the same rate) was not a matter having exclusive nexus with the income and expenditure as aforesaid. This Court does not propose to go into the question whether the amount obtained by way of loan from the Bank could have been 'legally diverted' to some other establishment of choice of the assessee without the concurrence of the Bank. However, the fact remains that no such consent or concurrence was obtained and no document was produced to hold that it was a transaction permitted by the Bankers of the assessee. The verdict passed by the Apex Court in Rajendra Prasad Moody' s case does not come to the rescue of the appellant/assessee, having failed to establish the ingredients of Section 57(iii). 15. Coming to the decision rendered by the Delhi High Court (following the verdict of the Apex Court in Rajendra Prasad Moody's case ) and sought to be relied on by the appellant/assessee, the question of law fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising the amount borrowed from the Bank, as specifically adverted to in 'paragraph 22', which reads as follows: 22. In the present case, the advancing of loan to SCL was a business decision taken by the Assessee out of commercial expediency. Further, the sanction letter of HSBC made it clear that the Assessee could draw loans upto the sanctioned limit as and when needed. The sanction letter also permitted the Assessee to further utilise the money borrowed to advance loans to others. The sum of ₹ 25 crores drawn by the Assessee on 24th December 2001 in terms of HSBC's sanction letter was transferred to SCL on the very same date. Without the facility of credit by the HSBC, the Assessee could not have advanced the loan to SCL. Therefore, there was a direct nexus between the earning of interest on the loan advanced by the Assessee to SCL and payment of interest to HSBC on the loan drawn in terms of the sanction letter dated 2nd August 2001. The income earned on the loan advanced to SCL was rightly offered to tax by the Assessee as 'income from other sources'. Since the interest paid to HSBC on the loan availed was in the nature of an expenditure wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs could be inferred? This Court answered the questions in favour of the assessee which made the Revenue to take up the matter before the Apex Court. It was a case where the assessee had effected some fixed deposits in the Bank and had earned interest of ₹ 117444/- thereon during the assessment year in question. The assessee had taken a loan from the Bank on the security of the above Fixed Deposit and had paid a sum of ₹ 90410/- to the Bankers. It was accordingly, that the assessee had claimed that he could be taxed only on the differential amount of ₹ 27034/- The claim was rejected by the assessing authority and the first appellate authority; whereas it was allowed by the Tribunal taking a contrary view, which led to the appeal filed by the Revenue before this Court raising the questions as aforesaid and inviting the judgment as mentioned already. 18. In appeal, after hearing both the sides, a finding was rendered by the Apex Court in the following terms: 3. It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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