AMIT BAJAJ ADVOCATE

Arvind Kumar Bansal for the Appellant. S.D. Sharma for the Respondent.

ORDER

Pramod Kumar, Accountant Member - This is an appeal filed by the assessee and is directed against the order dated 20th December, 2012 passed by the learned Commissioner (Appeals), in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2008-09.

2. Ground No. 1, 4, 5 and 6, being general in nature, do not call for any adjudication and are treated as infructuous.

3. In ground no. 2, the assessee has raised the following grievance :—

Because the authorities below has wrongly and arbitrarily held that the sales consideration of land sold by the assessee was not proper without considering the reasons given by the assessee for selling the land for the price lesser than the circle rate fixed by the district was too high and as such application of section 50C is wrong, illegal and against the facts of the case speciality when no reference is made to the valuation officer. Circle rate was 258000/- sales consideration was 1,60,000

4. The relevant material facts are as follows. During the relevant previous year, the assessee had sold a piece of land for stated consideration of Rs.1,64,000. However, since stamp duty valuation of this land was Rs.2,58,000, the Assessing adopted the same for computation of long term capital gain. The assessee's contentions, inter alia, to the effect that the stated consideration was fair market value of the land in question "as the land was situated in underdeveloped area, there was unauthorised possession of the land and as there were number of pits in the land" and "as such, the circle rate fixed in the area could not apply" was simply brushed aside. Aggrieved, assessee carried the matter in appeal but learned CIT(A) also rejected the grievance of the assessee and observed that " I find that the AO was justified in taking the sale consideration at Rs.2,58,000 as per the provisions of Section 50 C because the assessee (appellant) could not produce any evidence showing that the market value of the land was less than the circle rate". The assessee is not satisfied and is in further appeal before us.

5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position.

6. We find that here is a case in which the assessee has specifically objected to the adoption of stamp duty valuation rate. The mere fact that the appellant has not challenged the stamp duty valuation cannot be put against the assessee. The authority for the this proposition is contained in, Hon'ble jurisdictional High Court's judgment, in the case of CIT v. Chandra Narain Chaudhuri ([2013] 38 taxmann.com 275 (Allahabad), wherein Their Lordships have observed that, "The question as to whether the assessee filed any objections before the Stamp Valuation Authority to dispute the valuation, or filed appeal or revision or made reference before any authority, court or the High Court under sub section (2) (b) of Section 50 C of the Act is not of any relevance in this case, as the AO himself observed that the assessee did not dispute the stamp valuation before the Stamp Valuation Authority. There may be several reasons for the purchaser not to file such objection. A purchaser may not go into litigation, and pay stamp duty, as fixed by the Stamp Valuation Authority, which may be over and above the fair market value of the property, as on the date of transfer, though the amount so determined has not been actually received by owner of the property". The position as to whether reference should be made to the DVO, even when there is no specific plea to that effect by the assessee, is now well set out in Hon'ble Calcutta High Court's judgment in the case of Sunil Kumar Agarwal CIT ( GA No 3686/2013 in ITAT No 221/ 2013; judgment dated 13th March 2014), wherein Their Lordships have, inter alia, observed as follows:—

" ….we are of the opinion that the valuation by the departmental valuation officer, contemplated under Section 50C, is required to avoid miscarriage of justice. The legislature did not intend that the capital gain should be fixed merely on the basis of the valuation to be made by the District Sub Registrar for the purpose of stamp duty. The legislature has taken care to provide adequate machinery to give a fair treatment to the citizen/taxpayer. There is no reason why the machinery provided by the legislature should not be used and the benefit thereof should be refused. Even in a case where no such prayer is made by the learned advocate representing the assessee, who may not have been properly instructed in law, the assessing officer, discharging a quasi judicial function, has the bounden duty to act fairly and to give a fair treatment by giving him an option to follow the course provided by law."

7. As there is no binding judicial precedent contrary to what has been held by Hon'ble Calcutta High Court, as above, the esteemed views of Their Lordships, even though from a non jurisdictional High Court, bind us as well.

8. In the light of the above legal position, the plea of the assessee, as set out in the ground of appeal, is indeed well taken. The prevailing legal position is now like this. Once the assessee claims that the actual market value of the land or building is less than stamp duty valuation adopted by the authorities, it is incumbent upon the Assessing Officer to refer the valuation of said land or building to the departmental valuation officer. In the present case, the Assessing Officer has not done so. In view of this factual position, and in the light of the discussions above, we deem it fit and proper to remit the matter to the file of the Assessing Officer for adjudication de novo after making a reference to the DVO, and completing the assessment on the basis of the valuation so received from the DVO. While so deciding the matter afresh, the Assessing Officer will decide the matter in accordance with the law, by way of a speaking order and after giving a reasonable opportunity of hearing to the assessee. We direct so.

9. Ground No. 2 is thus allowed for statistical purposes in the terms indicated above.

10. In ground no.3, the assessee has raised the following grievance:—

Because the disallowance of rebate of interest paid to the bank on security of FDR of Rs.436705/- is wrong and illegal specially when the circumstances for taking the loan was duly explained and to earn more income.

11. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee had made a fixed deposit of Rs 1,00,00,000 with ICICI Bank and earned interest of Rs 11,77,574 on these deposits. However, while computing the income from other sources, the assessee claimed a deduction of Rs 4,36,705 on account of interest paid on loan of Rs 75,00,000 taken, on the security of deposits. When asked to justify this deduction, the assessee submitted that the assessee needed her funds, as she had to give money to her son and with a view to avoid premature encashment of the fixed deposits, for that purpose, which would have resulted in net loss to her, she took a loan against fixed deposit so as to keep the fixed deposit intact and earn the interest income thereon. It was contended that the interest of Rs 4,36,705 thus paid on the borrowings from ICICI Bank, against security of fixed deposit, was thus made for the purpose of earning FDR interest income of Rs 11,77,574. The Assessing Officer was, however, not impressed with this plea. He rejected the claim of deduction for Rs 4,36,705 with rather cryptic observations that, "since the expenditure of Rs 4,36,705 being accrued interest on loan has not been laid out or expended wholly and exclusively for the purpose of making or earning income from FDRs, claim of the assessee isnot correct and not admissible in view of the provisions of Section 57 (iii) of the Act". Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without any success. Learned Commissioner (Appeals) upheld, and in fact fortified, the stand of the Assessing Officer, and, while doing so, observed as follows:

6.3 I have considered all the facts relating to disallowance of interest as discussed by the AO in the assessment order as well as the argument taken by the ld. AR in his written submission. The only argument of the ld. AR against the disallowance of interest claimed by the appellant out of interest income on FDRs by not encashing the FDRs and taking loan against the FDRs for giving gift to her son is that she has shown higher income from FDR because if she had encashed FDRs for giving the gift, no interest income could have been accrued to the assessee (appellant) and hence, in view of the ld. AR, if any expenditure is incurred in paying interest on such loan, it should be allowed against the interest income earned by the assessee (appellant) from FDRs. However, against such argument of the ld. AR, the contention of the AO as discussed in the assessment order is that the interest paid to the bank is relating to a loan which has not been utilized for purchasing of FDRs and hence, such interest cannot be considered as laid out or expended wholly and exclusively for the purpose of making or earning of income from FDRs. As per section 57(iiii), any expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income should be allowed deduction against the 'income from other sources'. There is no dispute that interest income from FDR is assessable under the head 'income from other sources' and hence, if any deduction is required to be allowed against such income, it should be allowed as per the provision provided under this head. From the fact of the case, it is very clear that the loan taken from the bank has been utilized for giving of gift and hence, such loan cannot be considered to have been utilized for purchase of FDRs and, therefore, if any interest is paid on such loan, it could not be said to have been laid out or expended wholly and exclusively for the purpose of earning of income as interest from FDRs. Therefore, I find that the AO is correct in holding that the interest paid on the loan taken from bank for the purpose of giving gift to son of the assessee (appellant), cannot be allowed as deduction u/s.57(iii) against the interest income on FDRs and the ld. AR is not justified in taking up the argument that the assessee (appellant) has shown higher income on FDRs by taking loan against the FDRs from the bank. The money of the FDRs belonged to the assessee and she can utilize this money in the manner as she wants to use it whether by encashing it. out rightly or by taking loan out of such FDRs, but any claim of the expenditure against a particular income can be allowed as per the provision of Income-tax Act only and from the fact of this case, it is very clear that the interest paid on loan taken from bank cannot be allowed against the interest income of the FDRs u/s.57(iii) because it could not be said to have been laid out or expended wholly and exclusively for the purpose of earning of income as interest from FDRs. Therefore, I confirm the decision of the AO for disallowing the• interest of Rs.4,36,705/• u/s.57(iii) against the interest income on FDRs and hence, the addition of Rs.4,36,705/• is confirmed and accordingly, ground no.3 is dismissed.

12. The assessee is not satisfied with the order of the learned Commissioner (Appeals) as well, and is in further appeal before us.

13. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position.

14. Let us first take a look at the undisputed factual position, in the backdrop in which the assessee resorted to borrowings against the security of fixed deposits in question, which is set out in assessee's submissions dated 19th December 2012, as reproduced at pages 7 and 8 of learned CIT(A)'s order. The relevant part of these submissions is as follows:

That the assessee has taken the loan from ICICI Bank of Rs.75,00,000/- -which was taken on security of FDRs lying with the bank and amount was gifted to Shri Ashu Agarwal. As regard disallowance of interest paid on loan is concern the same should not be disallowed as the assessee has shown full interest on the total FDR, as such the net of the interest received and paid should be taxed.

It is to clear here that the FDR was purchased by the assessee last year on which the interest rate was 11.10% while at the time of taking the loan the interest was of 9.5% and to save the higher interest the assessee has not encashed the same otherwise the gross interest would be lesser than what the net interest is shown as the assessee has to get interest much less what she received up to the period of taking loan which has to be worked out by the bank on the basis of the duration of FDR remained by the bank up to the date of taken loan which shall be only about 6% being for less than 6 month period. A working of interest could be earned if the FDR was encashed on the date of taking the loan is given as below:

Interest on 1,00,00,000/- @ 6% i.e. 01.04.2007 to 30.07.2007

That from the perusal of the record you will find that the assessee has shown interest of Rs.736625/- (Rs.1173330/- minus 436705/- intt. paid on loan) while if the assessee encashed the FDR for giving gift to son then the interest on FDR would be 538481/- i. e. interest on FDR encashed on 20.07.2007 of Rs.5000000/- Rs.141606/- plus Rs.396875/- as worked out above.

Thus it is clear that the assessee has taken the loan on FDR to save the income earned and the assessee has shown higher income what she would have to earn when she encashed the FDR for making gift in place of taken loan.

From the above it is clear that due to payment of interest on loan against FDR the receivable is more than what can be earned on encashment of the FDR at the time of gifting the amount.

15. There is no dispute that interest income in this case is to be taxed as an 'income from other sources'. Section 57(iii) of the Act clearly provides that "the income chargeable under the head ' income from other sources' is to be computer making the deduction, namely..(inter alia)... any...expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income". It is thus clear that as long as an expenditure is incurred wholly or exclusively for the purpose earning an income, such an expenditure constitutes an admissible deduction in computation of the income.

16. The question that we really need to adjudicate on is, therefore, whether or not income paid on interest against the fixed deposits can be said to have been incurred "wholly and exclusively" for the purpose of earning interest income from fixed deposits.

17. The legal connotations of expression "wholly and exclusively" came up for consideration before a coordinate bench of this Tribunal, though in the context of deductions from business income, and the coordinate bench, extensively reproducing from binding judicial precedents, observed as follows in the case of Ajay Singh Deol v. JCIT [(91 ITD 196) 2004]:

8. We find guidance from a passage from the judgment of House of Lords in the case of Atherton v.British Insulated & Helsbey Cables Ltd. [1925] 10 Tax Cases 155 (HL), referred to with approval by the Hon'ble Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), which reads as follows:

"It was made clear in the above cited cases of Usher's Wilshire Brewery v. Bruce (supra) and Smithv. Incorporated Council of Law Reporting [1914] 6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of business may yet be expended wholly and exclusively for the purpose of the trade; and it appears to me that the findings of the CIT in the present case, bring the payment in question within that description. They found (in words which I have already quoted) that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible-thus in effect, though not in terms, negativing the Crowns contentions. I think that there was ample material to support the findings of the CIT, and accordingly hold that this prohibition does not apply."

It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively'. Explaining this principle, Hon'ble Supreme Court has, in the case of Sassoon J David & Co. (P) Ltd. v. CIT [1979]118 ITR 261 (SC) inter alia observed that :

"It has to be observed here that the expression "wholly and exclusively" used in s. 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of s. 37 of the IT Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the IT Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under s. 37. Sec. 37(1) in the Bill read "any expenditure…… laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed…." The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law."

18. It is thus clear that as long as the expense is incurred wholly and exclusively for the purpose of earning an income, even if it is not necessarily for earning that income, it will still be deductible in computation of income. What thus logically follows is that even in a situation in which proximate or immediate cause of an expenditure was an event unconnected to earning of the income, in the sense that the expenditure was not triggered by the objective to earn that income, but the expenditure was, nonetheless, wholly and exclusively to earn or protect that income, it will not cease to be deductible in nature. It is also important to bear in mind the fact that a borrowing against fixed deposit cannot be considered in isolation of a fixed deposit itself inasmuch as, going by the admitted facts of this case, the interest chargeable on the fixed deposit itself is linked to the interest accruing and arising from the fixed deposit. On these facts, in order to protect the interest earnings from fixed deposits and to meet her financial needs, when an assessee raises a loan against the fixed deposits, so as to keep the source of earning intact, the expenditure so incurred in wholly and exclusively to earn the fixed deposit interest income. The authorities below were apparently swayed by the fact that the borrowings were triggered by assessee's financial needs for personal purposes and, by that logic, the borrowing cannot be said to be wholly and exclusively for the purposes of earning interest income, but what this approach overlooks is whether the expenditure is incurred for directly contributing to the beginning of or triggering the source of income or whether the expenditure is for protecting, and thus keeping alive, that source of income, in either case it is expenditure incurred wholly and exclusively for the purpose of earning that income. The assessee indeed required that money, so raised by borrowing against the fixed deposits, for her personal purposes but thats not relevant for the present purposes. The assessee could have gone for premature encashment of bank deposits, and thus ended the source of income itself, as well, but instead of doing so, she resorted to borrowings against the fixed deposit and thus preserved the source of earning. The expenditure so incurred, in our considered view, is an expenditure incurred wholly and exclusively for earning from interest on fixed deposits. We are alive to the fact that in the case of a business assessee, and in a situation in which the borrowings against fixed deposits were resorted to for use in business, consideration for end use of funds so borrowed would be relevant because the interest deduction is claimed as a business deduction under section 36(1)(iii). That aspect of the matter, however, is academic in the present context as the limited issue for our consideration is whether or not, on the facts before us, the interest on borrowings against the fixed deposits could be said to protect the interest income from fixed deposit interest and thus, incurred wholly and exclusively for the purposes of earning such income.

19. For the reasons set out above, in our considered view, the assessee deserves to succeed on this issue as well. We uphold her grievance and, accordingly, direct the Assessing Officer to delete the impugned disallowance.

20. Ground No. 3 is thus allowed.

21. In the result, the appeal is allowed in the terms indicated above.