TaxTMI 
TaxTMI 
TaxTMI 
2024 (6) TMI 570
X X X X Extracts X X X X
X X X X Extracts X X X X
.... short-term capital gains to be treated as income from long term capital gains and concessional rate of tax levied thereon under section 112(1) of the Act. Considering the commonality of issues raised in all the appeals before us , they were all taken up for hearing together and are being disposed off by this common consolidated order. 5. We shall be dealing with each issue, and applying our decision to the respective appeals where the issue has been raised accordingly. Taking up the first issue of a claim of expenses under section 57(iii) of the Act. ISSUE NO.1 6. The ld.counsel for the assessee pointed out that the common issue arising in all the appeals pertained to the claim of expenses under section 57(iii) of the Act against the income from other sources earned by way of interest income on fixed deposits. 7. Brief background of the case is that the assessee is a cooperative credit society, a joint venture of the Government of India and cooperative societies engaged in the manufacturing of polyester filament yarn. Keeping in view heavy losses incurred by the assessee-society, the Central Registrar of the Cooperative Societies had appointed a Liquidator to wind up the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....04-05, the interest income earned by the assessee was to the tune of Rs. 37,32,077/-. The interest income was earned from funds deposited in bank, which funds were found to be provided by the Government of India for the purpose of liquidation. The expenses claimed against the same were to the tune of Rs. 1,79,48,000/-The break-up of which is reproduced at page no.5 of the order of the ITAT as under: RECEIPT EXPENDITURE i) Interest on FDR deposited from funds provided by Govt. 3732077 Legal & Prof.charges 519000 ii) Rent & other income 850135 Bank charges 1000 Car/Taxi running exp. 836000 Computer hiring charges 118000 Travelling & conveyance 99000 Data processing charges 466000 Electricity & water charges 319000 Entertainment expenses 9000 Salary & benefits 3269000 Insurance 7000 Int.on Govt.of India loan 3480000 Repair & maintenance 82000 Postage, telegram & fax exp. 14000 Security charges 3685000 Printing & statione....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of section 57(iii) of the I.T.Act have not been thoroughly examined and scrutinized at the time of assessment. Section 57(iii) states that the income chargeable under the head "income from other sources" shall be computed after making the deduction of the expenditure, not being in the nature of capital expenditure, laid out wholly and exclusively for the purpose of making or earning such income. Meaning thereby if the assessee had incurred expenditure on payment of interest, then he is firstly required to establish that those very loans which were raised from Government of India have eventually being invested in FDRs on which interest was earned. The assessee has to place on record that when all those Government loans were released and how those loans were deposited in the shape of FDRs. If the assessee is able to furnish that the earning of interest was directly linked with the liability of interest, then naturally the assessee is in a position to say that the expenditure was incurred wholly and exclusively for earning of interest. We have taken this view after carefully perusing the order of the Hon'ble Madras High Court pronounced in the case of CIT vs. Gannon Dunkerley and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the decision in each case would depend upon the facts of its own case and according to the facts of the present case, the Tribunal recorded a clear finding that the expenses were incurred by the official liquidator to maintain the infrastructure for the earning of the interest income and without incurring the expenditure, it would not have been possible for the official liquidator to earn the interest income. We are of the view that the finding of the Tribunal clearly shows that there is a nexus between the expenditure and the interest income earned and that finding regarding the nexus, in our opinion, is a finding of fact. In view of the finding of the Tribunal, we hold that the Tribunal was correct in holding that the entire expenditure incurred by the assessee is deductible under the provisions of s. 57(iii) of the Act." 7.1. Likewise, in cited decision of Palani Sri Murugan Textiles Ltd. vs, Asst.CIT 254 ITR 333 (Mad.) the view expressed was that the receipt of the income by way of interest and dividends was made possible by reason of the pendency of the winding up proceedings. The deposits and investments being the amounts which were part of the amounts to be distributed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the decision of the Hon'ble Madras High Court, stated above, was applicable in its case. 18. We have gone through the decisions of both the Hon'ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd., (supra) and also two decisions of the Madras High Court referred by the ITAT in the first round, and relied upon by the ld.counsel for the assesse before in support of its claim of entire expenses under section 57(iii) of the Act. These decisions cited by both the parties are not, in any way, contradictory. In fact the principle of allowability of claim of expenditure incurred in liquidation against the interest income earned on deposits made by the liquidator has been laid down by the Hon'ble Apex Court in the Vijaya Lakshmi Sugar Mills Ltd.(supra) very clearly, wherein in the facts of the case before it, where the assessee's claim was with respect to the expenses incurred by the assessee's liquidator in the process of liquidation, the same were held clearly to be not allowable, since the Hon'ble Supreme Court noted that the said expense could not be said to have been incurred solely for the purpose of earning interest income. The Hon'ble Apex Court held that there should be s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....parately for earning the interest. However we may hasten to add that if any expenditure was incurred like commission for collection or such similar expenditures which may be considered as spent solely for the purpose of earning that income, the position may be different. But that was not so in this case. It could not also be said that the expenditure incurred was to preserve or acquire the asset. Nor could it be said that the expenses were incurred for the purpose of maintenance of the source. The requirement under section 57(iii) that the expenditure should have been incurred 'for the purpose of making or earning such income' shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. There could be no doubt that the expenditure incurred by the Liquidator in this case can by no stretch be said to have been incurred with the object or for the purpose of earning the interest income. The Tribunal was, therefore, right in holding that the expenses claimed are not related to the interest income and was not a deductible expenditure under section 57." 19. The Hon'ble Madras High Court, in both cases i.e. in the case ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re us in PB Page No.42 to 55. The contents of the same reveal that the interest bearing funds were granted for meeting the expenditure for running the office of the Liquidator. The assessee contends that the surplus remaining out of these loans granted, were deposited by the Liquidator in FDs till utilization of funds for the stated purpose, and interest income earned thereon. There is no stipulation from the government that even the interest earned on the loans granted to the assessee deposited in banks is to be utilized for meeting the liquidation expenses. It is only the unsecured loans given which are to be utilized for meeting the liquidation expenses. Therefore, purpose 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. 22. The same follows for all different expenses which were incurred by the liquidator which admittedly were incurred only for the purpose of carr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es. 25. In the light of the same, we find no merit in the contentions of the assessee that all the expenses incurred, including the interest paid on the loan obtained from the Government for carrying out the liquidation process, were allowable in terms of section 57(iii) of the Act against the interest income earned on deposits from the surplus remaining with liquidator out of unsecured loans given to it to meet the liquidation claims. In view of the above the issue of allowability of expenses incurred during liquidation as per 57(iii) of the Act stands decided against the assessee. 26. The assessee has also raised a connected ground before us of claim of set off of losses under the head "income form other sources" against the income returned to tax under other heads. This ground also needs to be dismissed since we have disallowed the claim of expenses under the head "income from other sources" and there arises consequently no losses to the assessee under the head Income from Other sources . ISSUE No.2 27. Taking up next issue relating to the levy of concessional rate of tax of deemed short term capital gains earned by the assessee under section 50 of the Act. Briefly stated ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... tax at a concessional rate in terms of section 112(1) of the Act. 31. The ld.counsel for the assessee pointed out that in a series of decisions the ITAT has held that the depreciable assets held for a period of more than 36 months qualified as long term capital gains and are entitled to benefits to which the LTCG are entitled in terms of provisions of the Act. He drew our attention to the decision of the ITAT, Mumbai in the case of Smita Conductors Ltd. Vs. DCIT, (2014) 41 taxmann.com 514 and drew our attention to the finding of the ITAT in that case, categorically holding that prescriptions of section 50 are to be extended only to stage of computation of capital gains, resulting in transfer of depreciable assets, which was held for more than three years would retain the character of long term capital gain for purposes of all other provisions of the Act. He pointed out that the ITAT in the said case relied on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Ace Builders Ltd. (2006) 281 ITR 210 (Bom). Our attention was drawn to para 2.4 to 2.6 of the order as under: "2.4 We have perused the records and considered the matter carefully. The dispute is regarding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Act. In this case the Ld. AR for the assessee submitted that flat had been held for 15 to 20 years which is supported by the fact that cost of the flat as shown in the balance sheet was only Rs. 1,30,000/-. Therefore, if the flat is held for more than three years the tax rate has to be applied as provided in section 112 of the IT Act applicable in respect of capital gain arising from transfer of long term capital asset. 2.6 We, therefore, held that, for the purpose of computation of capital gain, the flat has to be treated as short term capital gain u/s 50 of the IT Act, but for the purpose of applicability of tax rate it has to be treated as long term capital gain if held for more than three years. We accordingly direct the AO to compute the capital gain from the sale of flat and apply the appropriate tax rate after necessary verification in the light of observations made in this order. 32. Thereafter, the ld.counsel for the assessee pointed out that this decision was followed in several other decisions by the ITAT as under: i) Poddar Brothers Investment P.Ltd., ITA No.1114/Mum/2013 dated 25.3.2015; ii) DCIT Vs. Eveready Industries India Ltd., ITA No.159/Kol/2016 dat....