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TMI Blog2024 (6) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... e of taking unsecured loans or being granted unsecured loans from the government was for meeting the liquidation expenses. The purpose clearly was not to earn interest income there from. Therefore, the interest expenditure incurred on these unsecured loans has nexus only with the incurrence of liquidation expenses, and has no nexus with the earning of interest income. The same follows for all different expenses which were incurred by the liquidator which admittedly were incurred only for the purpose of carrying out the process of liquidation. The purpose of incurring the expenses definitely was not to earn any interest income. Therefore, even with respect to the expenses of liquidation, there is no nexus, direct or indirect, with the earning of interest income. Therefore, on the touch-stone of the conditions to be fulfilled u/s 57(iii) of the Act, for allowability of claim of expenses incurred by the liquidator against the interest income earned during liquidation, we find that, all the claims of the assessee fail ,with no nexus established between incurrence of expenditure and earning of interest income. Assessee s contention that the liquidator, in the process of liquidation, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the head income from other sources and there arises consequently no losses to the assessee under the head Income from Other sources. Levy of concessional rate of tax of deemed short term capital gains earned by the assessee under section 50 - HELD THAT:- The short term capital gains returned by the assessee in terms of provisions of section 50 of the Act on assets held for a period of more than 36 months be treated as long term capital gains and taxes be levied thereon at the concessional rate prescribed u/s 112(1) of the Act. X X X X Extracts X X X X X X X X Extracts X X X X ..... reating the same as reasonable expenditure for earning the interest income. 8. In Asst.Year 2004-05 and 2009-10, the matter travelled to the ITAT, and the ITAT first dealt with the issue in Asst.Year 2004-05 and reiterated its decision in Asst.Year 2009-10. The ITAT noted that all the facts relating to the expenditure incurred by the assessee needed to be re-examined in the light of the provisions of section 57(iii) of the Act as interpreted by the Hon'ble Madras High court in the case of CIT Vs. Gannon Dunkerley and Co. P.Ltd. 243 ITR 646 (Mad) and Palani Sri Murugan Textiles Ltd. Vs. ACIT, (2002) 254 ITR 333 (Mad). Accordingly, the issue was restored back to the AO for reconsideration. In the second round the AO confirmed the disallowance which was confirmed by the ld.CIT(A) in the assessee's appeal before him. Aggrieved by the same , the assessee has come up in appeal before us in A.Y 2004-05 & A.Y 2009-10 in second round.. 9. In the remaining two years, the issue has travelled upto us in the first round itself, but the order of the ld.CIT(A) confirming disallowance of expenditure under section 57(iii) of the Act is a reiteration of his order in the case of the assessee for As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the decisions cited before us as also documents placed before us. There is no denying the fact that the claim of expenses in the present case is to be adjudicated in terms of provisions of section 57(iii) of the Act. The interest income earned by the assessee, against which such claim of expenditure has been made, has been taxed under section 56 of the Act, under the head "income from other sources", and there is no dispute with respect to this aspect. 14. Going forward, we have perused the order of the ITAT in the first round in the case of the assessee for Asst.Year 2004-05, copy of which was placed before us, which judgment was rendered in ITA No.170/Ahd/2008 order dated 13.1.2012. To understand the directions of the ITAT, it is relevant to go through its finding and directions contained in para-7 and 7.1 of the order as under: "7. Having heard the submissions of both the sides, in our considered opinion, both the issues, i.e. the claim of expenditure of interest on Government of India loan of Rs. 34,80,000/- and the other expenditure, such as, legal expenses, car running expenses, traveling, repair and maintenance, etc. are required to be re-examined by the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Tribunal clearly show that the official liquidator has incurred expenditure for the purpose of protecting the source of income. In addition thereto, the earning of interest income by the official liquidator cannot be construed in isolation or apart from other activities of the official liquidator. The official liquidator performed his statutory duties and during the course of his performance of duties, he incurred certain expenditure and earned the interest income. Therefore, we are of the view that there is a connection or nexus between the expenditure incurred and the interest income earned by the official liquidator. We are of the view that the decision of this Court in CIT vs. Dwarka Chit Funds (P) Ltd. (supra) would apply to the facts of the case and this Court after noticing the decision of the Kerala High Court in Wandoor Jupiter Chits (P) Ltd. (In Liquidation), In re (1992) 195 ITR 244 (Ker) : TC 41R.697, the decision of the Calcutta High Court in United Provinces Electric Supply Co. Ltd. vs. CIT (1992) 92 CTR (Cal) 155 : (1993) 204 ITR 794 (Cal), and the decision of the Supreme Court in Vijaya Laxmi Sugar Mills Ltd. vs. CIT [1991] 191 ITR 641 held as under: &helli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urugan Textiles Ltd. Vs. ACIT (supra) for having taken this view. What arises from the order of the ITAT in the first round, therefore, is that the facts relating to the expenditure were noted to be not clear so as to establish nexus between the earning of interest income and incurrence of expenses, for determining the allowability of expenses against interest income. Therefore, the issue was restored back to the AO to examine the facts of the case and to adjudicate in the light of the provisions of section 57(iii) of the Act, which were noted to be interpreted by two decisions of the Hon'ble Madras High Court as noted above. 16. We have gone through the order of the AO in the second round. We find that the AO went on to hold that the assessee was unable to establish any such nexus while confirming the disallowance of expenditure, and the ld.CIT(A), we have noted, confirmed the order of the AO, following the decision of the Hon'ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd., (supra). 17. The assessee's contention, though before us was that the claim was allowable, since the assessee has established the factum of incurrence of expenditure for liquidation in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat those expenses are allowable deduction from income earned by way of interest from fixed deposits in the relevant year. In computing the income chargeable under the head 'Income from other sources', section 57(iii) provides that deduction is to be made in respect of expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. The question for consideration, therefore, is whether the expenses of the type incurred by the Liquidator in this case can be said to have been incurred solely for the purpose of earning the interest income. It is true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But since the expenditure must have been incurred for the purpose of earning that income, there should be some nexus between the expenditure and the earning of the income. There is not even some sort of an evidence to show that the expenses incurred by the Liquidator were to facilitate the earning or at least for protecting of the income. The interest accrues sui generis. The interest is payable by the bank, whether it is claimed or not and whether there is any establishment or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the above is that allowability of claim of expenses in the present case under section 57(iii) of the Act, is to be construed in the light of the principles laid down by the Hon'ble Apex Court and Madras High Court read together. And the underlining principle for the same undoubtedly is as laid down by the Hon'ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd.,(supra),which is that for the allowability of expenses there has to be a nexus between the incurrence of expenditure, and the earning of interest income. The expenses ought to have been incurred directly and/or indirectly for the purpose of earning interest income. It is for the purposes of determining this fact that the matter was restored to the AO by the ITAT in the first round in A.Y 2004-05 & 2009-10. 21. Applying the above proposition to the facts of the case before us, we find that as far as the claim of interest expenditure is concerned, the same has been stated to have been incurred on interest bearing loans granted by the Government to the assessee to meet its liquidation expenses. In this regard several copies of letters from the Government of India, Ministry Chemical and Fertilizers for releasing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y expenses which were incurred for the purpose of earning interest income are allowable as per section 57(iii) of the Act. Merely because the incidence of both the income and expenses happen in the same process of liquidation does not establish nexus of the expenses incurred with the earning of interest income. Interest income has been earned on deposits of funds while expenses are incurred for liquidation process. If the directive of granting interest bearing loan included, besides the loan also the interest earned therefrom to be utilised for meeting expenses of liquidation, it could be said that the interest expenses had a nexus with the earning of interest income, because the purpose of incurring interest expenses in that case would be to meet liquidation expenses out of loan and to earn interest again for meeting liquidation expenses. In such circumstance the interest expense would be allowable u/s 57(iii) of the Act having nexus with the earning of interest income. But that is not the case before us. 24. In the present case, it was the duty of the liquidator to have retained a portion of interest income to meet the income-tax liability arising as per law, and to use only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in liquidator's account to be set off against the capital gains earned. As for the issue of unabsorbed depreciation, the ld.CIT(A) had allowed the set off of the same against the capital gains, against which the Revenue had gone in appeal to the ITAT, who in turn confirmed the order of the ld.CIT(A) in its order in ITA No.1465/Ahd/2017 & Others dated 27.11.2019. 30. The assessee's plea before us is that the concessional rate of tax leviable on long term capital gains in terms of provisions of section 112(1) of the Act, be applied to short term capital gains earned on the sale of depreciable assets in terms of provisions of section 50 of the Act. His plea is that the short term capital gains includes assets held for more than 36 months. That gain on sale of such assets are to be treated as long term capital gains entitled to levy of taxes at a concessional rate in terms of section 112(1) of the Act. He drew our attention to the order of the ld.CIT(A) denying this claim for the reason that the provisions of the Act are very clear, treating the capital again arising on sale of depreciable to be short term capital gain, and there was no question, therefore, for recharac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e than three years. It has been argued that provisions of section 50 deeming the capital gain as short term capital gain is only for the purposes of section 48 and 49 which relate to computation of capital gain. The deeming provisions has, therefore, to be restricted only to computation of capital gain and for the purpose of other provisions of the Act, the capital gain has to be treated as long term capital gain. The view canvassed by the learned AR is supported by the judgment of Hon'ble High Court of Bombay in case of Ace Builders (P.) Ltd. (Supra) in which it has been held that for the purpose of other provisions of the Act such as section 54EC the capital gain has to be treated as long term capital gain, if the asset is held for more than three years. The same view has been taken by the Mumbai bench of Tribunal in case of Manali Investments v. Asstt. CIT [2011] 45 SOT 128/10 taxmann.com 293 in which it has been held that the prescriptions of section 50 are to be extended only to the stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was held for more than three years would retain the character of long term c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire balance amount of expenditure on the ground that the same are not allowable from other income assessed as Income from Other Sources. 1.1 The learned Commissioner (Appeals) ought to have held that the interest received is not the income of the assessee as the Government had given the loans to undertake the process of liquidation and the interest has been earned by the user of its money with the assessee and if the same is taxable in the hands of the assessee then the assessee is entitled to deduct the interest payable to the Government on the loans taken by the assessee." Ground No.1.0 and 1.1 relates to the issue no.1 dealt with by us and decided against the assessee at para 13-26 of our order above. These grounds are accordingly dismissed. In the result, appeal of the assessee is dismissed. ii) ITA No.1253/Ahd/2017 A.Y 2009-10: In this appeal similarly worded identical grounds are raised by the assessee as in ITA No.1273/Ahd/2017.Our decisions rendered therein applies mutatis mutandis in this appeal also. Therefore, this appeal of the assessee is dismissed. iii) ITA No.1254/Ahd/2017 A.Y 2011-12: The grounds raised therein are as under: "1.0 The learned Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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