Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-11, Mumbai ('CIT(A)' for short) dated 28.02.2013, dismissing the Assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2010-11 vide order dated 11.01.2013.
2. The only issue arising in the instant appeal, agitated per its two grounds, as under, is the maintainability or otherwise in law of the assessee's claim of interest paid on borrowed capital (from bank) invested in a house property, against interest income assessable u/s. 56, i.e., in computing the income chargeable under the head of income 'income from other sources':
| '1. |
On the facts and circumstances of the case and as per the provisions of law, the learned Commissioner of Income Tax (Appeals) has erred in confirming disallowance of Rs.14,19,007/- being the amount of interest paid and claimed as deduction against the interest receipts. |
2. |
On the facts and circumstances of the case and as per the provisions of law, the learned Commissioner of Income Tax (Appeals) has further erred in confirming application of section 14A for disallowing such interest, whereas the investment was not made for earning any exempt income. It was made for acquiring house property.' |
3. The admitted facts are that the assessee's borrowing from bank was toward and, in fact, utilized for/invested in a residential house, income from which is assessable u/s.22. The property being self occupied, the assessee in fact claimed and was allowed interest on the said home loan to the extent permissible in computing the income under the said head of income for such, i.e., self occupied, property, at Rs.1,50,000/-. The balance interest (Rs.14,19,007/-) was set off against the assessee's interest income on loan (at Rs.15,34,628/-) to one, M/s. Shubham International. The basis of the assessee's claim is that had he withdrawn his loan and invested in the house property, he would not have earned the said interest. Correspondingly, he would not suffer interest on the bank borrowing. In fact, that is what he had intended to, but could not, as he was not able to retrieve the loan money back from the person to whom he had lent, in time, necessitating a temporary arrangement by way of bank borrowing. However, the two arrangements are at par, so that interest suffered, i.e., in excess of Rs.1,50,000/- (Rs.14.19 lacs), ought to be adjusted in computing his 'actual income'. Reliance is placed on the decision in the case of Rajkumari Aggarwal v. Dy. CIT [IT Appeal No. 176 (Agra) of 2013, dated 18-7-2014], wherein the Tribunal, in a similar situation, allowed the assessee's claim for interest on borrowings against the interest arising on bank FDRs, on the security of which the borrowing was raised.
4. We have heard the parties, and perused the material on record.
4.1 Viewed from any angle, the assessee's case is misconceived and not tenable in law. To begin with, the total income under the Act, i.e., chargeable to tax there-under, is to be computed by classifying it, according to the nature of the income, under various heads of income, with the income not covered under any specific head falling to be classified under the residuary head, i.e., 'income from other sources'. Further, income under any head of income is to be computed following the computation provisions as specified for the relevant head, which stand classified as various parts of Chapter IV of the Act, i.e., Chapter IV-A to IV-F. Only the expenditure/outgoings specified under the relevant head of income and, further, subject to the conditions specified in respect thereof, stand to be allowed in computing the income under that head of income. Merely because the assessee may have incurred an expenditure toward or in relation to an income falling under a particular head of income, would not by itself be sufficient to allow the same. It would be so only where the same is listed as an admissible deduction and, two, satisfies the condition/s specified for deduction, to which the same is therefore subject. In the present case, section 24(b) governs the deduction on account of interest on borrowed capital for the purpose of acquiring house property or improvement thereto. The same, however, limits the deduction in respect of self occupied property (SOP) at Rs.1,50,000/-. This, in fact, even as observed during hearing, is what had led to what we may term as an 'imbalance' as per the assessee's plans. But for this limit, the entire interest on borrowed capital (Rs.15,69,007/-) would stand to be allowed against income under Chapter IV-B, i.e., income from house property, resulting in the two arrangements, i.e., either withdrawing money lent and saving interest to bank, or, alternatively, assuming borrowing for investment in house property, being at par, both financially (perhaps, that is – the interest rates on borrowing and monies lent being not known), as well as under the tax regime. Assuming a tax equivalence, while none existed, then, thus, represents the fundamental fallacy in the assessee's argument and case, i.e., the underlying assumption that the two arrangements being financially equivalent (or nearly so), would lead to a similar or same consequence in law as well. We have already clarified that income under the Act has to be necessarily computed following the computation provisions prescribed under the relevant head of income, i.e., under which it falls. That the two arrangements may be financially equivalent would not necessarily imply, even as was found by us in the present case with reference to the limitation provision for interest qua SOP, that it shall be so under law as well. That a particular arrangement has different implication/s in law vis-a-vis an equivalent financial arrangement, is no ground to discard or not give effect to a clear provision of law, against which there is even otherwise no estoppel. The disallowance of the assessee's claim is under s. 24(b) itself and, at best, read with s. 57(iii), and there is no need to travel to s. 14A of the Act; there being no income not forming part of the total income for invocation of the said section, to though either no benefit to the assessee or prejudice to the Revenue.
4.2 The issue under reference is in fact covered against the assessee, as again observed by the Bench during hearing, by the decision by the Apex Court in CIT v. Dr. V.P. Gopinathan[2001] 248 ITR 449/116 Taxman 489 . In the facts of that case the assessee had moneys in fixed deposit, on which it earned interest at Rs. 1,17,444/-. He borrowed on the security of the bank deposit, paying interest to the bank at Rs. 90,410/-, claiming that he be taxed only on the differential amount of Rs.27,034/-. The same being allowed by the tribunal and the hon'ble high court, the Revenue carried the matter in appeal by special leave. The claim was negatived on the ground that it had no basis in law, i.e., s. 57(iii), inasmuch as there was no nexus, as in the present case, between the interest earned and paid.Would it matter, the court wondered, if the assessee had instead taken a loan from a different bank or against any other security ? The interest paid did not reduce the income by way of interest on fixed deposit placed by him with the bank in any manner.
4.3 Coming, next, to the decision in the case of Raj Kumari Aggarwal ( supra ). In the facts of that case the assessee borrowed on the security of the bank FDRs, and gifted the amount to her son. The rationale for the same was explained to be financial inasmuch as a premature encashment of FDRs would result in a lesser (net) interest accruing to her. The adopted course was exhibited to be financially more profitable, i.e., even after accounting for the interest on the loan against FDRs, which borrowing was finally liquidated out of the maturity proceeds of the FDRs. The interest on the borrowing was allowed set off of against interest on FDRs in computing income u/s. 56. The two cases are thus only apparently similar, and bear material differences. The borrowing in that case was not invested in any house property or toward any source of income . How could, one may ask, a borrowing be gifted ? The assessee only intended to, and did indeed, gift the property represented by the FDRs, by, instead of closing the FDRs prematurely, borrowing against them in view of the latter course being more profitable, i.e., in terms of the net interest income. The borrowed capital could only be and was met from the maturity proceeds of the FDRs, extinguishing both the borrowing/s and the FDR/s simultaneously. It is under these circumstances that the tribunal held the interest paid to bank as toward protecting the said source of income. The finding is correct in-as-much as the two, i.e., the FDRs and the borrowing thereon, were inextricably linked to the income, for the interest (to the bank) to be exigible to deduction against the interest on the FDRs. The claim was allowed not on the basis of any financial equivalence, as contended by the assessee before us, but of a direct nexus, meeting, thus, the stipulation of s. 57(iii). This is as it found that the borrowing would directly impact the bank interest inasmuch as it (the borrowing) only saved interest. The decision in fact has support of the decisions by the Apex Court, as in Challapulli Sugars Ltd. v. CIT [1975] 98 ITR 167 and Tulicorin Alkali Chemicals & Fertilizers Ltd. v. CIT[1997] 227 ITR 172/93 Taxman 502 (SC).
In the present case, on the other hand, the bank borrowing has been invested toward another source of income, i.e., income from house property. The same may not necessarily result in any income and, in any case, has no relation to the income by way of interest on the bank deposit, on the security of which the borrowing was raised for investment in house property, and against which income the interest thereon is sought to be set off. That the assessee could have invested in house property out of his sources, in which case he would not have suffered interest at all, is a different matter altogether. The two investments, i.e., house property and interest bearing loan, have different income potential/implications, and carry different risks. The two streams of income, flowing from vastly different sources, are subject to different computational provisions under the Act, and bear different risk profiles. To say, therefore, that interest on a borrowing applied toward house property be deducted against the income from the property on the security on which the same is raised, is misplaced. Rather, the claim of interest on borrowing applied to a particular source of income (house property) against income arising from the said source of income, i.e., house property (Rs.1.50 lacs) as well as against income from another source, i.e., income from other sources (at Rs.14.19 lacs), is self contradictory. The borrowing is undertaken only for investment in house property. The assessee may have his reason for the same, but that would not operate to alter or change the character of the income arising there-from, or the expenditure incurred in relation thereto, and which shall therefore, subject to the provisions of the Act, stand to be allowed there-against, as indeed has been in the instant case. The said decision is, thus, distinguishable on facts, even as was found to be the case by the apex court in Dr. V. P. Gopinathan (supra ) with reference to the facts in the case of Jashvidyaben C. Mehta v. CIT [1988] 172 ITR 680/37 Taxman 249 (Guj.), and would be of no assistance in the facts of the present case.
5. In the result, the assessee's appeal is dismissed.