TaxTMI 
TaxTMI 
2022 (2) TMI 662
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....rned A O in so far as it is against the appellant is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The learned Pr. CIT failed to appreciate that there was no error much less an error prejudicial to the interest of the revenue in the order passed by the learned Assessing Officer warranting revision u/s.263 of the Act and consequently, the order passed by the learned Pr. CIT is opposed to law and facts of the appellant's case and requires to be cancelled. 3. The learned Pr.CIT ought to have appreciated that the issue with regard to allowance of interest claim was duly examined by the learned A.O. in the assessment proceedings and therefore, the assessment order passed u/s. 143[3] of the Act, dated 29/10/2018 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 Rs. 50,05,491/- 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 interes....
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....y shares in REPL to one M/s Cyient Ltd., on 02/01/2015, for a consideration of Rs. 51,87,63,126/-. In respect of the said transfer of equity shares, he computed long term capital gains of Rs. 51,51,45,445/- in respect of which, exemption u/s. 54F of the Act, of Rs. 13,46,76,416/- was claimed. 5. It is submitted that the net sale consideration of Rs. 51,87,63,126/- received on the transfer of 1,97,258 shares in REPL was initially invested in mutual funds. Thereafter, with a view to claim exemption u/s 54F of the Act, the assessee was required to make a deposit in the Capital Gains Deposit Account Scheme [CGDA Scheme]. Hence, the assessee had availed a loan from HSBC Invest Direct Financial Services [India] Ltd., on the security of mutual funds. Out of the loan so availed, the assessee deposited an amount of Rs. 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 Rs. 46,94,130/- apart from exempt capi....
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....er application of mind and hence, there was no jurisdiction to revise the assessment order. That apart, the assessee also justified the deduction allowed by pointing out that there was a clear and direct nexus between the loan availed and the fixed deposits made in the CGDA Scheme. He contended that there was no prohibition under the Act in making deposits in the CGDA Scheme from any source and that there was no requirement to make the aforesaid deposits only out of the sale consideration to avail the benefits of section 54F of the Act. 10. However, the PCIT passed the impugned order u/s. 263 of the Act dated 22/03/2021, holding that the assessment order passed by the AO u/s. 143[3] of the Act, dated 29/10/2018 is erroneous and prejudicial to the interest of revenue and directed the AO to disallow the 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 ....
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....revenue as held by the PCIT. As already submitted, the A.O. had made inquiries and verification in course of the assessment proceedings that were warranted before allowing the deduction claimed by the appellant u/s. 57 of the Act. Furthermore, it is not a case where the A.O. had allowed the deduction without making any inquiry as there was due application of mind by the A.O. before passing the assessment order. Hence, the conditions mentioned in [a] & [b] above that are sought to be invoked for treating the assessment order as erroneous are not attracted to the case of the assessee. Further, the Pr. CIT has not established that the case of the assessee comes within condition [c] or [d] mentioned above. Thus, it cannot be said that the order passed was erroneous insofar as it is prejudicial to the interests of the revenue and accordingly, the 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....
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....28.9.2015. 2. The said sum was utilized for making Fixed Deposits with Corporation Bank, Mysore Main Branch, Mysore, on 29-09- 2015. 3. I am attaching loan statement from HSBC Invest Direct Financial Services (India) Ltd. and also Corporation Bank Pass Book copy which reflects the credit of Rs. 10,50,00,000/- being the loan from HSBC Invest Direct Financial Services (India) Ltd. and Debit of the same towards making of the Corporation Fixed Deposits. 4. As there is direct nexus between the Fixed Deposits made and loan taken, interest paid on HSBC Invest Direct Financial Services (India) Ltd. Loan has been claimed as a deduction from the interest earned on Corporation Bank Fixed Deposits." 20. Now the real controversy between the parties is with regard to the extent of enquiry which was made by the AO while framing the assessment. The contention of the ld. AR is that there was detailed 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 ....
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....l funds in first instance; [b] It should therefore also be deemed that the loan borrowed from HSBC Invest Direct Financial Services [India] Ltd., was the source of the investment made in mutual funds. 24. The ld. AR submitted that without availing the loan from HSBC Invest Direct Financial Services [India] Ltd., and servicing the interest thereon, the assessee would not have been able to make the fixed deposit in the CGDA Scheme and thus would not have earned any interest from Fixed Deposit at all. As duly noted and also conceded by the Pr. CIT in the impugned order, there is no requirement for the deposit to be made in the CGDA Scheme only from out of the net consideration received on transfer of the capital asset, which is a settled position of law. It can be done from any source and the deduction claimed u/s. 54F of the Act is allowable. Hence, the Pr. CIT has rightly observed in the impugned 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 CG....
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....the interest paid on loan used for the purpose of investment in CGDA Scheme. To allow deduction u/s. 57(iii) of the Act, there should be nexus between the amount incurred to earn income. The amount of interest paid by the assessee on loan was used to make investment in the CGDA Scheme has nothing to do with the interest earned on mutual funds. Being so, this interest receipt and interest payment cannot be set off against each other. For this purpose, he relied on the following orders:- - Hamendra Singh v. CIT, 170 ITR 58 (Raj) wherein it was held that interest was not paid for the purpose of keeping or maintaining the earning of fixed deposit interest but was paid on the amount of loans taken for constructing the house. The motive of the assessee that he took loans on his fixed deposits in order to save them and to maintain his interest income was irrelevant. He had an option to incur the said expenditure. 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 t....
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....o meet the statutory liability of making the deposit. The test to apply is that the expenditure should be wholly and exclusively for the purpose of earning the income. Accordingly, interest paid by the assessee could not be allowed as a deduction. - Kaviraj Mahipat Singh v. CIT, 175 CTR 310 (Raj) where the Assessee took loans from banks against fixed deposits held by him in same banks. He received interest on said deposits and also paid interest on loan. 70 per cent of loan amount was used for construction of house and balance for business purpose. ITO rejected assessee's claim that only net interest income was taxable and disallowed 70 per cent of interest paid on loan corresponding to part of loan used for house construction. The Rajasthan High Court held that in view of Supreme Court's decision in CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449/116 Taxman 489, ITO's action was justified and called for no interference. - H.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....
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....ff 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 incurred not for the purpose of earning income, but it is on the borrowings used for investment in CGDA scheme. At this stage, it is appropriate to place reliance on the case of Karnataka Forest Plantations Corpn. Ltd. v. CIT, 156 ITR 275 (Kar) wherein it was held as under:- "12. The borrowings were not 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....
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....d. In principle, there appears to us no difference, if instead of paying in cash the payment of the price is in the share of giving over shares of the company, when the transaction is not challenged on the ground of fraud and is approved by the Court in the reorganisation of the capital of the company. In our opinion, therefore, the ground on which the Income-tax Appellate Tribunal and the High Court disallowed the claim of the assessee is not sound." (p. 7) What was paid by the assessee in that case was interest or an expenditure in respect of its income and it was on that basis, the Supreme Court found that the case attracted section 12(2). But, that is not the position in the present. In my view the true ratio of this 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 petiti....
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....int out that section 57(iii) occurs in a fasciculus of sections under the heading, 'F-Income from other sources'. Section 56, which is the first in this group of sections, enacts in sub-section (1) that income of every kind which is not chargeable to tax under any of the heads specified in section 14, items A to E shall be chargeable to tax under the head 'Income from other sources' and subsection (2) includes in such income various items, one of which is 'dividends'. Dividend on shares is thus income chargeable under the head 'Income from other sources'. Section 57 provides for certain deductions to be made in computing the income chargeable under the head 'Income from other sources' and one of such deductions is that set 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 sectio....