2014 (5) TMI 1197 - AT - Income Tax

Interest expenses on loans for bond investments allowed by Tribunal under Section 57(iii)

ACIT Circle-46 (1), New Delhi Versus Sanjeev Aggarwal

ACIT Circle-46 (1), New Delhi Versus Sanjeev Aggarwal - TMI Issues Involved:1. Entitlement to claim of interest expenses under Section 57(iii) of the Income Tax Act, 1961.2. Nexus between the interest paid on loan and the income earned from other sources.Issue-wise Detailed Analysis:1. Entitlement to claim of interest expenses under Section 57(iii) of the Income Tax Act, 1961:The revenue appealed against the order of the CIT(A) allowing the assessee to claim interest expenses of Rs. 52,48,337 under Section 57(iii) of the Income Tax Act, 1961. The revenue argued that the assessee sought to derive double benefits by claiming exemption under Section 54EC for capital gains and simultaneously claiming deduction under Section 57(iii) for interest paid on a loan taken to invest in 54EC bonds. The assessee contended that the interest expense was justified and allowable under Section 57(iii) because the loan was taken to purchase bonds, which generated taxable interest income.2. Nexus between the interest paid on loan and the income earned from other sources:The revenue argued there was no direct or indirect nexus between the interest expenditure and the income declared under other sources. According to the revenue, Section 57(iii) requires that the expenditure be incurred wholly and exclusively for earning the income. They contended that the loan was taken to avail exemption under Section 54EC, not for earning interest income. The assessee countered that the loan was taken due to a shortfall in funds resulting from deferred sale consideration of shares, and the borrowed funds were used to purchase bonds that generated interest income. The assessee maintained that this established a clear nexus between the interest paid on the loan and the interest earned from the bonds.Detailed Analysis:Background:The assessee, an individual, filed a return declaring total income, including income from salaries and other sources. The assessment was completed with an addition of Rs. 52,48,337 due to disallowance of interest expenses. The assessee appealed to the CIT(A), which was initially dismissed ex-parte but later readjudicated in favor of the assessee upon remand by the Tribunal.Revenue's Argument:The revenue contended that the interest expense did not meet the criteria of Section 57(iii) as it was not incurred wholly and exclusively for earning interest income. They argued that the loan was taken to avail exemption under Section 54EC, not for making an interest-bearing investment.Assessee's Argument:The assessee argued that the loan was taken to cover a shortfall in funds due to deferred sale consideration of shares, and the borrowed funds were used to purchase bonds that generated interest income. The assessee claimed that this established a clear nexus between the interest paid on the loan and the interest earned from the bonds, making the interest expense deductible under Section 57(iii).Tribunal's Findings:The Tribunal noted that the assessee had invested borrowed funds in bonds and earned interest thereon. They referenced a similar case involving another promoter and director of the same company, where the Tribunal allowed the deduction of interest paid on a loan used to purchase bonds. The Tribunal found that the loan was taken wholly and exclusively for purchasing bonds, establishing a clear nexus between the income earned and the expenditure incurred. They concluded that the interest expense was allowable under Section 57(iii) and upheld the CIT(A)'s order.Conclusion:The Tribunal dismissed the revenue's appeal, confirming that the assessee was entitled to claim the interest expenses under Section 57(iii) of the Income Tax Act, 1961. The Tribunal emphasized the clear link and nexus between the interest earned on the bonds and the interest paid on the loan, making the expenditure deductible.Order:The appeal preferred by the revenue was dismissed, and the order was pronounced in the open court on 09.05.2014.