Interest on loan against FDR security not deductible u/s 57 against interest income earned on FDR on the ground of protecting interest income from fixed deposits – ITAT
ABCAUS Case Law Citation:
ABCAUS 2438 (2018) 07 ITAT
The instant appeal was filed by the assessee against the order passed by the CIT(A) in confirming the disallowance of the claim of deduction of the assessee under Sec. 57(iii) of the Income-tax Act, 1961 (Act).
During the course of the assessment proceedings the AO observed that the assessee had offered interest income in his return of income. It was noticed that the assessee had offered interest income on Fixed deposits to tax after claiming deduction of interest expenses pertaining to a loan raised from the bank against the security of FDRs. The AO called upon the assessee to justify his claim of deduction of the interest expense under Section 57 of the Act.
It was submitted by the assessee that the aforesaid interest expenditure pertained to a bank loan against security of the FDR which was raised by him for purchase of a Flat. It was submitted by the assessee that by raising the bank loan he was able to protect the interest income received on the FDR. Alternatively, it was submitted by the assessee that as the interest expenditure was incurred on the funds borrowed for acquisition of a property, thus, the same would even otherwise be entitled for deduction under Sec. 24(b) of the Act.
However, the AO observed that there was an absence of an inextricable nexus between the incurring of the interest expenditure and earning of the interest income as required under Section 57(iii) of the Act, therefore, disallowed the claim of deduction raised by the assessee.
The CIT(A) observed that the interest expenditure was not wholly and exclusively incurred by the assessee for earning of the interest income, the CIT(A) taking support of the judgments of the Hon’ble High Court and Hon’ble Supreme Court upheld the disallowance of the claim of deduction of the assessee under Section 57(iii) of the Act. The alternative contention of the assessee, that the interest expenditure incurred on the borrowed funds utilized for purchase of residential property would be entitled for deduction u/s 24(b), also did not find favor with the CIT(A).
The assessee carried the matter in appeal before the Tribunal and contended that the lower authorities had erred in disallowing the claim of deduction of the interest expenditure while assessing the income of the assessee. It was stressed that the decision of the assessee for not opting for a premature encashment of the FDRs and rather raising a loan from the bank to facilitate purchase of residential property, was backed with the intent of protecting the interest income received from the fixed deposits. That the interest expenditure incurred was liable for being set off against the interest income on FDRs.
The Tribunal observed that the deductions allowed against the income chargeable under the head “Income from other sources” are circumscribed in Sec. 57 of the Act. Still further, in case of interest income earned by an assessee, only the expenditure (not being in the nature of a capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is to be allowed as a deduction under Sec. 57(iii) of the Act.
The Tribunal opined that the interest expenditure incurred by the assessee on the loan raised for purchase of property (against the security of FDRs), cannot be construed as having been laid out or expended wholly and exclusively for the purpose of making or earning of the interest income on the said FDRs, therefore, the same cannot be allowed as a deduction as against the interest income of the assessee.
The Tribunal observed that the Hon’ble Supreme Court deliberating in the backdrop of identical facts had observed as under:
“It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is : does it make any difference that he took the loan from the same bank in which he had placed the fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit by him in the bank.”
Thus the Tribunal opined that the issue under consideration was no more res integra in light of the judgment of the Hon‟ble Apex Court and upheld the order of the CIT(A) to the said extent. However on the issue of deduction under Sec. 24(b) of the Act, the Tribunal restored the matter to the file of the A.O, for verification of the eligibility.
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