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TMI Blog2022 (2) TMI 704X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual funds - In this case, the assessee received the sale consideration on sale of shares. The sale consideration was used for purchase of mutual funds - For making deposit under CGDA Scheme, the assessee has taken loan from HSBC Bank and paid interest thereon. The interest paid on loan has been claimed as deduction out of interest received from fixed deposit parked under CGDA Scheme u/s 57(iii) In the present case, the borrowings were made by the assessee to deposit in the CGDA Scheme so as to avail the benefit u/s. 54F of the Act. The assessee has paid interest on the loan availed for the purpose of making investment in CGDA scheme. The assessee used the sale consideration receive on sale of shares in mutual funds and earned interest out of it. The assessee wants to set off the interest paid on loan amount out of interest income received from mutual funds. As seen from the above, the borrowings are not made to make investment in the mutual fund and earn interest therefrom. The borrowed amount was used to make investment in CGDA scheme. The interest income was received by the assessee from mutual funds only was totally independent of the borrowings. The interest expenditure is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/10/2018 cannot be regarded as erroneous in so far it is prejudicial to the interest on Revenue to take action u/s. 263 of the Act. 4. Without prejudice to the above, the learned Pr. CIT failed to appreciate that interest paid of ₹ 49,11,102/- to HSBC Invest Direct Financial Services [India] Ltd., was to earn interest received from fixed deposit and thus the same was allowable as a deduction from interest income under the facts and in the circumstances of the appellant's case. 5. Without prejudice to the above, the learned Pr. CIT erred in holding that the source of deposit in CGDA Scheme was the net consideration received on the transfer of capital asset on account of spirit of section 54F and that the identity of the deposit in the CGDA Scheme becomes that of the Net Consideration received on transfer of the capital asset without appreciating that there are no statutory provisions in the Act to arrive at such a deeming fiction and therefore, the said view taken is opposed to law and facts of the appellant's case and thus, the same deserves to be vacated. 6. The learned Pr. CIT erred in holding that on the same logic it was also to be deemed that the investment in Mut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 13.50 Crores in the CGDA Scheme with Corporation Bank. Accordingly, he claimed exemption u/s.54F of the Act to the extent of the deposit made in the CGDA scheme for the AY 2015-16. 6. For the AY 2016-17 under appeal, the assessee had originally filed his return of income u/s.139[4] of the Act on 31/03/2017 reporting total income of ₹ 46,94,130/- apart from exempt capital gains of ₹ 14,13,79,119/- u/s.10[38] of the Act. In the return of income filed, he claimed deduction with regard to the interest expenditure of ₹ 49,11,102/- on the loan taken from HSBC Invest Direct Financial Services [India] Ltd., [which loan raised by the appellant was invested in CGDA Scheme deposit of ₹ 10,30,00,000/-] from the interest earned of ₹ 41,54,640/- on the deposits made in the CGDA Scheme. 7. ORIGINAL ASSESSMENT: The case of the assessee was selected for limited scrutiny under CASS for examination of "Large value of transaction [sale of equity with delivery] reported in Securities Transaction Tax Return and sale consideration disclosed in capital gains schedule is significantly less [STT Code 2 and sale consideration in Sch.CG of ITR] and "Large deduction claimed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest paid by the assessee against the interest received from CGDA Scheme. Besides, if the assessee claims that such interest is allowable as a deduction against the income received by him on account of investments made in the Mutual Fund Scheme, he can made such claim before the AO, who will consider the claim as per law and pass appropriate orders for the purposes of allowing assessee's claim. Thus, the Assessment order was restored to the file of the AO for this purpose. Against this, the assessee is in appeal before us. LEGAL ISSUE: 11. The ld. AR firstly submitted that the assessment order passed u/s. 143[3] of the Act, dated 29/10/2018 cannot be regarded as erroneous in so far as it prejudicial to the interest of Revenue for invoking the provisions of section 263 of the Act. From the records relating to the assessment proceedings, it is clear that the AO had examined the deduction claimed by the ASSESSEE u/s. 57 of the Act, from the interest income offered to tax. In course of the assessment proceedings, the assessee had made detailed submissions and had proved the nexus between the borrowed funds and the investment made in the CGDA Scheme and there is no dispute on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned order u/s 263 of the Act dated 22/03/2021 is bad in law and the same deserves to be quashed. The ld. AR relied on the following case laws:- - Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC) - Max India Ltd., 295 ITR 295 (SC) - CIT v. Cyber Park Development & Constructions Ltd., 430 ITR 55 (Kar) 14. The ld. DR supported the order of the PCIT. 15. We have considered the rival submissions on the legal issue with regard to invoking the provisions of section 263 of the Act by the PCIT. The PCIT can exercise revision proceedings u/s. 263 if he is satisfied that the order of the AO sought to be revised is erroneous and prejudicial to the interests of the revenue. Section 263 empower the PCIT to initiate section 263 proceedings where the AO either takes a wrong decision without considering the material on record or he takes a decision without making proper enquiry and that such enquiry was prima facie warranted. If the PCIT was of the opinion that there was no proper enquiry by the AO and the AO accepted the various claims of the assessee mentioned in his order without conducting further enquiry with regard to the genuineness of the claim of the assessee and it is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d enquiry by the AO on the issue taken up by the PCIT u/s. 263 of the Act, as such exercising jurisdiction u/s. 263 is bad in law. On the other hand, the ld. DR contended that the AO has accepted the claim of assessee without proper verification on wrong assumption of facts as well as law, as such without proper examination the assessee's claim was allowed which is prejudicial to the interests of the revenue, as such exercise of jurisdiction u/s. 263 by the PCIT is correct. 21. Having heard the rival submissions, we are unable to agree with the contentions of the ld. AR. The very basis on which action was taken by the PCIT is that the AO had not carried out the enquiry which he should have. The Delhi High Court in the case of Gee Vee Enterprises Ltd. v. Addl.CIT & Ors., 99 ITR 375 (Del) held that, "lack of enough enquiry by the ITO is patent from record ……………… Although details are filed by the assessee, the ITO did not make any enquiry by way of cross verification. He merely accepted the statement of the assessee without any enquiry or investigation". Further, in CIT V. Sophia Finance Ltd., 205 ITR 98 (Del)(FB), it was held that when full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned order that there was no adverse inference sought to be made with regard to the eligibility to claim deduction u/s. 54F of the Act. However, by virtue of the allowance of deduction u/s. 54 of the Act, it cannot be inferred and held that the source for making the deposit in the CGDA Scheme was the net consideration on account of spirit of section 54F and by stretching the same on logic, it has to be deemed that the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., was invested in mutual funds. There are no statutory provisions that permit such deeming fiction to be assumed and therefore, the view taken by the learned Pr. CIT is opposed to law and the same deserves to be vacated. 25. He submitted that, thus, the A.O. had rightly allowed the interest expenses incurred on loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., since the same was incurred to earn the interest received by the assessee on Fixed Deposits made under the CGDA Scheme and therefore, the directions of the Pr. CIT to disallow the same is contrary to law and facts of the assessee's case. Hence, the aforesaid directions issued by the Pr. CIT deserve to be vacated and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It depended upon his own personal consideration. It was not compulsory. His option had no connection with the earnings of interest from the fixed deposits. It could not be said that the interest was paid wholly and exclusively for the purpose of keeping and maintaining the income of interest therefrom. - CIT v. Bhawal Synthetics (India), 297 CTR 104 (Raj) wherein it was held that In the case in hand, it is not in dispute that the assessee had income of interest through FDRs and while setting off that the Assessing Officer as well as the ITAT did not examine the aspect as to under which provision the assessee claimed deduction or set off of his income from other sources against interest payable on the borrowed fund. The reason given is that the amount pertaining to FDR was not surplus amount but part of amount that was kept to obtain letter of credit for purchase of machinery. While accepting the fact that the FDR was for obtaining letter of credit to purchase machinery but so far as interest earned thereon is concerned, that is nothing but income through other sources, as such, the Commissioner rightly treated the same as income taxable. So far as the second question is concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H. Maharajakumari Meenakshideviavaru v. CIT, 150 ITR 247 (Kar) where it was held that the deduction of excess interest by the bank was effected on account of the premature termination of the fixed deposits and had no connection with the interest earned by the assessee up to the date of termination. The Tribunal was, therefore, justified and the assessee was not entitled to the deduction claimed. 28. Thus, he submitted that even otherwise the interest incurred by the assessee is in the capital field as it relates to acquisition of new asset which cannot be allowed as a deduction. Without prejudice to the above, he submitted that the asset acquired by the assessee is in the nature of personal asset, being so, interest incurred by the assessee is in personal nature which cannot be considered u/s. 57(iii) of the Act. He supported the order of the PCIT. 29. We have considered the rival submissions on merits. In this case, the assessee received the sale consideration on sale of shares. The sale consideration was used for purchase of mutual funds. For making deposit under CGDA Scheme, the assessee has taken loan from HSBC Bank and paid interest thereon. The interest paid on loan has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot made to make investments and earn interest from them. The borrowed amounts kept in shortterm deposits undoubtedly yielded interest. The interest income from such deposits was from such deposits only and was incidental to and was the result of the same. The interest income was totally independent of the borrowings. As pointed out by the Bombay High Court in CIT v. Jagmohandas J. Kapadia [1966] 61 ITR 663 at page 669 in interpreting the corresponding section 12(2) of the 1922 Act relied on by the ITO also, the expenditure incurred must be for the purpose of making or earning the income; which is not the position in the present case. In examining the claim, the incongruities and hardship caused, cannot obviously blur our approach. From this it necessarily follows that the conclusions of the ITO concurred with by the Commissioner are unexceptionable. 13. In Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) that interpreted section 12(2) which is the leading case on the point and around which a volume of case law has grown and which were all relied on, by Shri Sarangan the facts in brief were these: Eastern Investments Ltd. an investment company under an arrangement with one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case far from supporting the case of the petitioner, supports the case of the revenue. 14. In Seth R. Dalmia v. CIT [1977] 110 ITR 644, the Supreme Court was again dealing with a case under section 12(2) on expenditure incurred in the acquisition of shares by the assessee as such. Even the principles enunciated in this case that reiterate the principles enunciated in Eastern Investments Ltd.'s case (supra) do not support the case of the petitioner. The numerous other cases of other High Courts relied on by Shri Sarangan to which it is not necessary to make a detailed reference, did not deal with the exact question that arises for determination in these cases on similar fact situations and, therefore, do not really bear on the point and assist the petitioner. 15. In Traco Cable Corpn. Ltd. v. CIT [1969] 72 ITR 503, a Division Bench of the Kerala High Court was dealing with a case of receipts or interest paid on share deposits and the deductions claimed by the assessee on them under section 57(iii) The Division Bench speaking through Isaac, J., rejected the same in these words: "A reading of the above provision is sufficient to repudiate the contention that the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out in clause (iii) which reads as follows : ** ** ** The expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income………. " (p. 521) In the said decision this Court clearly indicated that: ".……It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. . . ." (p. 522) The taxing authorities as also the High Court have clearly recorded a factual finding facts that the expenditure in this case was to meet the personal liability of payment of income-tax and wealth-tax and annuity. From the order of the Tribunal as also the judgment of the High Court it appears that the assessee had taken the stand that even if the claim relating to income-tax and wealth-tax was not admissible, that part of the claim relatable to annuity deposit should have been admitted as it fetched interest. We are inclined to agree with the High Court that so far as meeting the liability of income-tax and wealth-tax is concerned, it was indeed a personal one and paym ..... X X X X Extracts X X X X X X X X Extracts X X X X
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