ACIT, New Delhi V. Shri Pavan Vaish, Gurgaon

ITA 2232/DEL/2010

• Counselvise Citation: 223220114 RSA 2010
• Duration Of Justice: 1 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 15-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 11-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRATIMA KAUSHIK
• Assessee Lawyers: RAJESH ARORA
• Keywords: Share purchase agreement

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `F : NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER I.T.A.NO.2232/DEL/2010 ASSESSMENT YEAR : 2006-07 ASSTT. COMMISSIONER OF INCOME-TAX, SHRI PAVAN VAIS H, CIRCLE 46(1), NEW DELHI. VS. 301-A, COURT GREENS, THE LABURNUM, SECTOR-28, SUSHANT LOK, GURGAON. PAN: AAHPA2071J (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. PRATIMA KAUSHIK, SR. DR. RESPONDENT BY : SHRI RAJESH ARORA, CA. O R D E R PER K.D. RANJAN, ACCOUNTANT MEMBER THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 2006 -07 ARISES OUT OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APP EALS)-XXX, NEW DELHI. 2. THE GROUNDS OF APPEAL RAISED ARE REPRODUCED AS U NDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN :- 1. WHETHER THE CIT(A) IS CORRECT IN HOLDING THAT INTER EST PAYABLE TO CITI BANK FOR PART FINANCING INVESTMENTS IN 54EC BONDS IS ALLOWABLE AS DEDUCTION U/S 57(III) OF THE ACT? 2 2. WHETHER THE ASSESSEES OWN CERTIFICATION THAT THE L OAN FUNDS ARE TOWARDS PURCHASE OF TAX SAVING CAPITAL GAIN BON DS COULD HAVE BEEN IGNORED BY THE CIT(A) IN RENDERING ANY DE CISION ON THE ALLOWABILITY OF INTEREST ON SUCH LOAN BONDS? 3. THE ONLY ISSUE FOR CONSIDERATION RELATES TO ALLO WING DEDUCTION UNDER SEC. 57(III) OF THE ACT ON ACCOUNT OF INTEREST PAID TO CITI BANK FOR PART FINANCING INVESTMENTS IN BONDS SPECIFIED IN SEC.54E C OF THE ACT. 4. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT D URING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT DEDUCTION OF RS.42,24,410/- WAS MADE AS INTEREST PAID ON LOAN FR OM CITI BANK FOR INVESTMENT IN CAPITAL GAINS SCHEME BONDS. DURING T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2005-06, THE ASSESS EE SOLD 32,92,254 SHARES OF DAKSH E-SERVICES (P) LTD. TO M/S. IBM GLOBAL SER VICES (I) (P) LTD. FOR TOTAL CONSIDERATION OF RS.51,85,52,790/-, OUT OF WH ICH 15% WAS HELD BACK BY M/S. IBM GLOBAL SERVICES (I)(P) LTD. PAYABLE IN F.Y. 2005-06 RELEVANT TO ASSESSMENT YEAR 2006-07. THE ASSESSEE EARNED LO NG TERM CAPITAL GAIN AMOUNTING TO RS.48,94,23,992/- AND SHORT TERM CAPIT AL GAIN OF RS.2,85,24,255/-, WHICH WAS OFFERED TO TAX IN A.Y. 2005-06. AGAINST THE LONG-TERM CAPITAL GAIN, THE ASSESSEE CLAIMED DEDUCT ION UNDER SEC. 54EC OF THE ACT AND INVESTED RS.48,94,80,000/- IN DESIGNATE D BONDS, FOR WHICH THE ASSESSEE HAD TAKEN A LOAN OF RS.6,42,80,000/- FROM CITI BANK DUE TO NON- 3 AVAILABILITY OF FUNDS SINCE 15% OF CONSIDERATION FO R SHARES WAS HELD BACK BY THE BUYER. 5. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E EARNED INTEREST ON AFORESAID BONDS AND ALSO EARNED INTEREST @ 15% ON A MOUNT HELD BACK BY M/S. IBM GLOBAL SERVICES (I) (P) LTD. AMOUNTING TO RS.3,32,75,808/-. AGAINST THE ABOVE INCOME FROM THE OTHER SOURCES, TH E ASSESSEE CLAIMED INTEREST EXPENSE UNDER SEC. 57(III) AMOUNTING TO RS .42,24,410/- ON THE LOAN TAKEN FROM CITI BANK FOR INVESTING IN BONDS. THE A SSESSING OFFICER DISALLOWED THE INTEREST EXPENSE UNDER SEC.57(III) O F RS.42,24,410/- ON THE GROUND THAT THERE WAS NO NEXUS BETWEEN THE INTEREST EARNED AND INTEREST PAID BY THE ASSESSEE. 6. BEFORE THE LEARNED CIT(A) THE ASSESSEE CLAIM ED THAT DEDUCTION FOR INTEREST PAID ON LOAN TAKEN FOR INVESTMENT IS ALLOW ABLE AS DEDUCTION UNDER SEC. 57(III) OF THE ACT AS THERE IS DIRECT NEXUS BE TWEEN THE INTEREST EARNED AND INTEREST PAID. THE LEARNED CIT(A) ON CONSIDERA TION OF ABOVE FACTS CAME TO THE CONCLUSION THAT INCOME EARNED ON BONDS HAS BEEN OFFERED FOR TAX AS INCOME FROM OTHER SOURCES AND THEREFORE, EXP ENDITURE INCURRED FOR EARNING SUCH INCOME IS ALLOWABLE UNDER SECTION 57(I II) OF THE ACT. THE FINE DISTINCTION HAS BEEN MADE BY THE AO BETWEEN MAKING AN INVESTMENT AND EARNING INTEREST ON SUCH INVESTMENT, WHICH IS FAR F ETCHED, ABSURD AND 4 UNNECESSARY. THE LEARNED CIT(A), THEREFORE, ALLOWE D THE INTEREST PAID ON LOAN TAKEN FOR PURCHASE OF BONDS. 7. BEFORE US, THE LEARNED SR. DEPARTMENTAL REPRESEN TATIVE SUBMITTED THAT THE ASSESSEE HAS BORROWED FUNDS FOR INVESTMENT IN BONDS FOR THE PURPOSE OF EXEMPTION OF CAPITAL GAIN UNDER SEC.54EC OF THE ACT. THEREFORE, THE INTEREST PAID ON FUNDS BORROWED CANN OT BE ALLOWED AS DEDUCTION. ON THE OTHER HAND, THE LEARNED AUTHORIZ ED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD SOLD S HARES OUT OF PROMOTERS QUOTA AND 15% OF SALE PROCEED WAS WITHHELD. THE AS SESSEE IN ORDER TO INVEST THE AMOUNT OF SALE PROCEEDS UNDER SEC. 54EC BORROWED FUNDS FROM CITI BANK. THE ASSESSEE HAD RECEIVED INTEREST ON B ONDS AND ALSO ON THE AMOUNT, WHICH WAS WITHHELD BY M/S. IBM GLOBAL SERVI CES (I) (P) LTD. THEREFORE, THE INTEREST PAID ON FUNDS BORROWED FOR THE PURPOSE OF INVESTMENT IN BONDS IS ALLOWABLE AS DEDUCTION AS TH ERE IS DIRECT NEXUS BETWEEN THE FUNDS BORROWED AND INTEREST PAID. 8. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH MATERIAL AVAILABLE ON RECORD. FROM THE FACTS STATED ABOVE, IT IS CLEA R THAT THE ASSESSEE HAD SOLD SHARES OF M/S. DAKSH E-SERVICES (P) LTD. TO M/S. IB M GLOBAL SERVICES (I) (P) LTD. AND HAD EARNED LONG TERM CAPITAL GAIN OF R S.48,94,23,992/-. THE ASSESSEE DID NOT RECEIVE ENTIRE SALE CONSIDERATION DURING THE YEAR. AS PER 5 THE TERMS OF SHARE PURCHASE AGREEMENT, AN AMOUNT EQ UAL TO 85% OF THE PRO RATA PURCHASE PRICE WAS PAYABLE IN F.Y. 2004-05 AND AN AMOUNT EQUAL TO REMAINING 15% HELD BACK WAS PAYABLE IN F.Y. 2005-06 . AGAINST THE LONG TERM CAPITAL GAIN OF RS.48,94,23,992/-, THE ASSESSE E CLAIMED DEDUCTION UNDER SEC. 54EC. IN ADDITION TO HIS OWN SOURCES, H E AVAILED LONG TERM LOAN FROM CITI BANK AMOUNTING TO RS.6,42,80,000/-FOR ACQ UIRING BONDS SPECIFIED IN SEC. 54EC OF THE ACT. THE TOTAL SALE CONSIDERATION TO BE RECEIVED BY THE ASSESSEE IN ASSESSMENT YEAR 2005-06 WAS RS.51,85,52,790/-. THE ENTIRE SALE CONSIDERATION W AS NOT RECEIVED BY THE ASSESSEE . THE ASSESSING OFFICER HAS DISALLOWED TH E CLAIM OF INTEREST SIMPLY ON THE GROUND THAT THE PURPOSE FOR WHICH THE LOAN WAS OBTAINED WAS DIFFERENT FROM THE EARNING OF INTEREST. THERE IS N O DISPUTE ABOUT THE FACT THAT THE ASSESSEE HAD EARNED INTEREST ON BONDS, WHI CH WERE PURCHASED OUT OF BORROWED FUNDS. IT IS NOT THE CASE OF THE AO TH AT FOR THE PURPOSE OF DEDUCTION UNDER SEC. 54EC, THE BORROWED FUNDS CANNO T BE UTILIZED IN PLACE OF SALE CONSIDERATION. THE ISSUE WHETHER DEDUCTION UNDER SEC. 54EC WAS AVAILABLE OR NOT, IN ASSESSMENT YEAR 2005-06 IS NOT BEFORE US. THE ASSESSEE HAS INVESTED BORROWED FUNDS IN ACQUISITION OF BONDS AND HAS EARNED INTEREST THEREON. THEREFORE, THE INTEREST P AYABLE ON BORROWED CAPITAL HAS TO BE ALLOWED AS DEDUCTION OF INTEREST EARNED ON SUCH 6 INVESTMENTS. FROM THE ASSESSMENT ORDER, IT IS NOT CLEAR AS TO HOW MUCH AMOUNT OF INTEREST WAS EARNED ON THE BONDS PURCHASE D FROM FUNDS BORROWED AT RS.6,42,80,000/-. DEDUCTION OF INTERES T UNDER SEC. 57(III) IS TO BE RESTRICTED TO THE EXTENT OF INTEREST EARNED ON B ONDS ACQUIRED OUT OF BORROWED FUNDS. WE THEREFORE, HOLD THAT THE ASSESS EE WILL BE ELIGIBLE FOR DEDUCTION OF INTEREST OUT OF INTEREST EARNED ON SUC H INVESTMENT. THE ASSESSING OFFICER IS DIRECTED TO VERIFY AND ALLOW T HE CLAIM OF THE ASSESSEE ACCORDINGLY. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 10. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 25 TH JANUARY, 2012. SD/- SD/- (R.P. TOLANI) (K.D. RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 25 TH JANUARY, 2012. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT. 7