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TMI Blog2022 (7) TMI 376X X X X Extracts X X X X X X X X Extracts X X X X ..... ified - Unless funds are borrowed for making deposits to earn interest income, such interest paid on borrowings cannot be allowed as deduction in the computation of income from other sources, which in this case, is interest earned from CGDA Scheme. In the facts stated above, there is no doubt that the funds borrowed from HSBC Bank was used for investment to earn interest income in the CGDA Scheme. The assessee wants to set off the interest paid to HSBC Bank with interest earned from CGDA Scheme. As per section 54F of the Act, the whole consideration of capital asset to be used for deposit in CGDA Scheme. In the present case, the assessee diverted the sale consideration of capital asset in investment in mutual funds. However, the assessee borrowed money from HSBC Bank to make investment in CGDA Scheme. The funds which ought to have been used for investment in CGDA Scheme is the amount received on sale consideration of capital asset. Because the assessee has mis-used the sale consideration to invest in mutual fund, the self-made mistake cannot be a reason to set off the interest paid to HSBC Bank out of interest earned from CGDA Scheme. Therefore, in our opinion, there is no merit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had earned interest income on mutual funds that was offered to tax under the head 'Other Sources'. It is submitted that the Petitioner had earned interest income from deposits made in the Capital Gains Account Scheme [CGDA] against which deduction was claimed for interest paid on loans availed from HSBC Invest Direct Financial Services [I] ltd and the same is also clearly brought out in the impugned order passed u/s. 263 of the Act. 4. Thus, the aforesaid conclusions and findings reached and recorded in para 34 of the order is contrary to the facts and material on record, which has also been observed in opening part of Para 32 of the Order, as under: 32. 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. .. 5. However, thereafter, in Para 32 of the Order, it has been erroneously considered as follows:- 32. .. The assessee used the sale consideration received on sale of shares in mutual funds and earned interest out of it. The assessee wants to set off the interest pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so failed to notice the decision of the Hon'ble Karnataka High Court relied upon by the learned DR in the case of Master Subraya M Pai reported in 150 ITR 251 [Kar]. In the said case, the Hon'ble High Court has considered whether excess interest repaid to banks on premature withdrawal of FD for the purpose of investment in shares is deductible u/s.57[iii] of the Act against the dividend income earned. It was held that the action of the assessee was similar to the act of borrowing money for the purposes of investment in shares. The assessee, instead of borrowing money had availed himself of his fixed deposit by pre-mature termination. The interest paid to bank was therefore an expenditure laid out wholly and exclusively for the purposes of earning dividend income. The assessee was therefore entitled to the deduction of the interest paid to bank from dividend income. It submitted that the ratio of the said decision is squarely applicable to the facts of the appellant's case, which has not been considered. 9. In view of the above, it is submitted that the findings in the order of the Tribunal that the Petitioner had earned interest from mutual funds and there was no nex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making deposits to earn interest income, such interest paid on borrowings cannot be allowed as deduction in the computation of income from other sources, which in this case, is interest earned from CGDA Scheme. In the facts stated above, there is no doubt that the funds borrowed from HSBC Bank was used for investment to earn interest income in the CGDA Scheme. The assessee wants to set off the interest paid to HSBC Bank with interest earned from CGDA Scheme. As per section 54F of the Act, the whole consideration of capital asset to be used for deposit in CGDA Scheme. In the present case, the assessee diverted the sale consideration of capital asset in investment in mutual funds. However, the assessee borrowed money from HSBC Bank to make investment in CGDA Scheme. The funds which ought to have been used for investment in CGDA Scheme is the amount received on sale consideration of capital asset. Because the assessee has mis-used the sale consideration to invest in mutual fund, the self-made mistake cannot be a reason to set off the interest paid to HSBC Bank out of interest earned from CGDA Scheme. Therefore, in our opinion, there is no merit in the arguments of the assessee that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make investments and earn interest from them. The borrowed amounts kept in short-term 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 its ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 wealthtax 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 payment thereof cannot at all be said to be expenditure laid out or e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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