2011 (4) TMI 861 - HC - Income Tax

Assessee must prove source of funds to avoid proportionate interest disallowance on shares yielding exempt income; onus rests with taxpayer

HC upheld disallowance of a proportionate amount of interest expenditure where the assessee failed to prove the source of funds used to acquire shares ... Disallowance of interest expenditure - income from trading in share, interest and commission - Held that:- It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant Assessment Year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, the assessing authority took a most reasonable approach in assessment - proportionate amount should be disallowed having regard to the total income and the income from the exempt source - Decided against the assessee Issues Involved:- Disallowance of interest expenditure relating to investment in shares- Allowability of entire interest expenditure as deduction under Section 36(1)(iii)- Entitlement to deduction of interest under sections 115O and 14A of the Income-tax ActAnalysis:1. Disallowance of Interest Expenditure:The appeal concerned an assessee's challenge against an order dismissing their appeal regarding interest disallowance related to investment in shares. The Assessing Officer disallowed a portion of interest based on the formula: Interest paid X Investments in shares / Total loan amount. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this disallowance due to the assessee's failure to provide evidence of share acquisition sources. The High Court found that the authorities rightly disallowed the interest as the assessee did not prove the source of acquiring shares, regardless of their age. The Court emphasized the need for the assessee to demonstrate the source of funds for share acquisition to claim deduction.2. Allowability of Entire Interest Expenditure:The appellant contended that the entire interest expenditure for trading in shares, granting loans, and investing in shares should be deductible under Section 36(1)(iii), without any disallowance. However, the Court referred to precedents stating that if an indivisible business generates both taxable and exempt income, Section 14A was enacted to disallow expenses related to income not forming part of the total income. The Court noted that the assessee's failure to prove the source of acquiring exempt income shares justified the proportionate disallowance of interest expenditure.3. Entitlement to Deduction of Interest:The appellant argued for deduction of interest under sections 115O and 14A, emphasizing that expenses should only be allowed if related to taxable income. The Court clarified that Section 14A aims to prevent claiming expenses on exempt income against taxable income. The appellant's failure to prove the source of acquiring exempt income shares led to the rejection of the claim for deduction. The Court upheld the Tribunal's decision, stating that the assessing authority took a reasonable approach in disallowing a proportionate amount of interest in the absence of evidence on share acquisition sources.In conclusion, the High Court dismissed the appeal, affirming the disallowance of interest expenditure and rejecting the claim for deduction under sections 115O and 14A. The Court emphasized the importance of proving the source of funds for share acquisition to support claims for deductions and upheld the Tribunal's decision as reasonable.