SATISH AGARWAL, Jaipur V. DCIT, Jaipur

ITA 970/JPR/2013

• Counselvise Citation: 97023114 RSA 2013
• Duration Of Justice: 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 10-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K KHANDELWAL
• Assessee Lawyers: S L PODDAR
• Keywords: Search and seizure; Earning of tax free income
• Section: 153A; 14A; 132

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH, JAIPUR ( BEFORE SHRI HARI OM MARATHA AND SHRI N.K. SAINI ) ITA NO. 970/JP/2013 ASSESSMENT YEAR: 2009-2010 PAN: ABSPA 0790 N SHRI SATISH AGARWAL VS. THE DCIT 534, MAHAVEER NAGAR. CENTRAL CIRCLE-3 TONK ROAD, JAIPUR JAIPUR (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S.L.PODDAR DEPARTMENT BY : SHRI A.K. KHANDELWAL DATE OF HEARING : 29.01.2014. DATE OF PRONOUNCEMENT : 05.03.2014 ORDER PER HARI OM MARATHA, J.M. THIS APPEAL BY THE ASSESSEE FOR THE A.Y. 2009-10 IS DIRECTED AGAINST THE ORDER OF THE LD CIT(A), CENTRAL, JAIPUR DATED 12-11-2013. 2.1 BRIEFLY STATED, THE FACTS OF THE SOLE ISSUE RA ISED ON MERITS IN THIS APPEAL REGARDING CONFIRMED ADDITION OF RS. 3,61,605/- MADE ON ACCOUNT OF INTEREST PAID TO BANK ARE THAT A SEARCH AND SEIZURE OPERATI ON WAS CONDUCTED ON 27- 08-2008 U/S 132 OF THE INCOME-TAX ACT, 1961 (THE A CT FOR SHORT) IN THE CASE OF AGARWAL (CARPET) GROUP THE ASSESSEE BELONGS TO. CONSEQUENT UPON THE EVIDENCE GATHERED DURING SEARCH A NOTICE U/S 153A O F THE ACT WAS ISSUED TO 2 THIS ASSESSEE ON 19-02-2009 FOR A.Y. 2009-10. IN RE SPONSE, THE ASSESSEE FILED HIS RETURN ON 29-02-2010 DECLARING TOTAL INCOME OF RS. 29,98,160/-. THE ASSESSMENT ORDER U/S 153A /143(3) OF THE ACT WAS P ASSED ON 13-12-2010 AT A TOTAL INCOME OF RS. 33,65,770/-. THE A.O. OBSERV ED THAT THE ASSESSEE DEBITED A SUM OF RS. 3,61,605/-IN THE INCOME AND EX PENDITURE ACCOUNT UNDER THE HEAD INTEREST PAID TO BANK. IT WAS FOUND THAT THE ASSESSEE HAD UTILIZED OVERDRAFT (OD.) FACILITY FROM THE BANK TO INVEST IN IPO OF THE INDIAN COMPANIES AND HAS PAID INTEREST TO THE BANK. THE AS SESSEE WAS ASKED TO EXPLAIN AS TO WHY INTEREST CLAIMED AS PAID TO THE H DFC BANK AGAINST OD A/C BE NOT DISALLOWED U/S 14A OF THE ACT. IT WAS EXPLAI NED THAT THE ASSESSEE PURCHASED FDRS FROM HIS OWN FUNDS AND AFTER THAT ON THE FORCE OF THESE FDRS HE HAS OPENED A OD A/C AND HAS AVAILED THE OD FACILITY. IT WAS STATED THAT FROM BANK THE ASSESSEE RECEIVED INTERESTS ON F DRS OF RS. 17,25,644/- AND HAS PAID INTEREST ON OD A/C OF RS. 3,61,605/-. THE ASSESSEE HAD HIS OWN FUNDS AND DID NOT OBTAIN LOAN FOR PURCHASING FDRS , THEREFORE, THE INTEREST PAID CANNOT BE DISALLOWED AS THE INTEREST EARNED AN D INTEREST PAID ARE DIRECTLY RELATED TO EACH OTHER. AFTER CONSIDERING THIS REPLY , THE A.O. BEING NOT SATISFIED BECAUSE ACCORDING TO HIM RECEIPT OF INTER EST ON FDRS IS A DIFFERENT SOURCE AND INTEREST PAID ON LOAN AMOUNT WHICH WAS I NVESTED IN ASSETS GENERATING EXEMPT INCOME DO NOT HAVE NEXUS TO EACH OTHER. HE HAS HELD THAT 3 EXPENDITURE ON ASSETS WHEREFROM ANY INCOME DERIVED IS EXEMPT FROM TAX U/S 10(3) OF THE ACT, CANNOT BE ALLOWED IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE ACT. THE A.O. HAS RELIED ON A DECISION OF DE LHI BENCH IN THE CASE OF CHEMINVEST LTD. VS ITO IN ITA NO.87/DEL/2008 DATED 5 TH AUG. 2009. HENCE, THE CLAIM OF THE ASSESSEE WAS REJECTED AND THE ADDI TION OF RS. 3,61,605/- HAS BEEN MADE. 2.2 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL AND ALSO MADE DETAILED SUBMISSION BEFORE THE LD CIT(A) WHICH IS INCORPORAT ED IN THE APPELLATE ORDER ITSELF. AFTER CONSIDERING THE WRITTEN SUBMISSIONS, THE LD CIT(A) HAS NOTED THAT IT IS TRUE THAT THE ASSESSEE HAS RECEIVED INT EREST OF RS. 17,25,644/- ON THE FDRS @ 9.75% P.A. AND THE FDRS HAVE BEEN PURCHASED FROM SURPLUS FUNDS AVAILABLE WITH HIM. THE LD CIT(A) HAS ALSO FO UND THAT DURING THE RELEVANT YEAR, AGAINST THESE FDRS THE ASSESSEE HA S TAKEN OVERDRAFT FACILITY AND HAS PAID INTEREST, @ 10.75%, TOTALING TO RS. 3 ,61,505/-. THE LD CIT(A) HAS OBSERVED THAT O.D. ACCOUNT DOES NOT CLEARLY STA TE HOW MUCH OVER DRAFT FACILITY HAS BEEN AVAILED AGAINST THE FDR. RATHER, HE HAS FOUND THAT DURING THE YEAR, THE OVERDRAFT FACILITY WAS USED TO MAKE INVEST IN THE IPOS AND SHARES, TO THE EXTENT OF RS. 26,40,550/- DURING THI S YEAR, APART FROM THE OVERDRAFT TAKEN TO ADVANCE LOANS TO OTHER PERSONS O UTSIDE THE FAMILY FROM WHOM INTEREST HAS BEEN CHARGED. THE LD CIT(A) HAS FURTHER OBSERVED THAT 4 THE ASSESSEE HAS MAINTAINED A CONTINUOUS CURRENT AC COUNT WITH THE MEMBERS OF HIS FAMILY AND ALSO WITH THE FROM M/S. CARPET PA LACE FROM WHERE AMOUNTS WERE WITHDRAWN FROM TIME TO TIME TO PREVENT THE OVE RDRAFT FROM GOING OVER THE PERMITTED LIMIT. THUS, THE LD CIT(A) HAS CONFI RMED THIS ADDITION. 2.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE CA REFULLY PERUSED THE ENTIRE MATERIAL ON RECORD. BEFORE US, BOTH THE PART IES HAVE REITERATED THE ARGUMENTS TAKEN BEFORE THE LD CIT(A). WE HAVE FOUND THAT THE ASSESSEE MADE FDRS FROM HIS OWN FUNDS WHICH WAS SUFFICIENTLY AVAI LABLE WITH HIM. THIS FACT HAS NEITHER BEEN DENIED BY THE A.O. NOR SUCCES SFULLY CONTROVERTED BY THE LD CIT(A). ON THESE FDRS, THE ASSESSEE HAS EARNED I NTEREST OF RS. 17,25,644/- @ 9.75% . THE ASSESSEE HAS PAID INTERE ST ON O.D. ACCOUNT @ 10.75%. IF ANY NEXUS IS FOUND TO EXIST BETWEEN THE INTEREST RECEIVED ON FDRS AND INTEREST PAID ON OD ACCOUNT THEN THE INTER EST PAID OF RS. 3,61,605/- HAS TO BE ALLOWED. IT IS A FACT THAT THE OD ACCOUNT WAS OPENED AGAINST THESE FDRS ONLY. THIS FACT HAS NOT BEEN DE NIED BY THE A.O. OR BY THE LD CIT(A). IN THAT VIEW OF THE MATTER WE DO NOT FIND ANY FALLACY IN THE CLAIM OF THE ASSESSEE THAT A NEXUS BETWEEN THESE T WO ASPECTS I.E. RECEIPT OF INTEREST ON FDRS AND PAYMENT OF INTEREST ON OD A/C, WHICH HAVE BEEN TAKEN AGAINST THE SECURITY OF FDRS, DOES EXIST AND IT HAS NOT BEEN SPELT OUT BY THE AUTHORITIES AS TO HOW THERE IS NO SUCH DIRECT NEX US BETWEEN TWO. IN CASE, 5 THERE IS A NEXUS THEN NETTING OF INTEREST HAS TO BE CONSIDERED AND THE IMPUGNED ADDITION DESERVES TO BE DELETED. BEFORE, W E CONCLUDE OUR FINDING, WE WOULD LIKE TO INCORPORATE THE FOLLOWING PORTION OF LD CIT(A)S ORDER FOR READY REFERENCE. I DO NOT CONCUR WITH THIS SUBMISSION OF THE APPELLA NT BECAUSE ONCE THE APPELLANT HAD INVESTED THE SURPLUS FUNDS IN THE FDR HE NO LONGER HAD, ANY SURPLUS FUNDS. THE FDR WAS AN ASSET WHICH WAS USED AS COLLATERAL FOR TAKING THE OVERDRAFT FACILITY. ONCE THE SURPLUS AVAILABLE WITH THE APPELLANT HAD ALREADY BEEN USED TO INVEST IN ONE KIND OF ASSET TH AT IS FDR IN PREFERENCE TO THE OTHER KIND OF ASSET I.E. THE IPO AND SHARES IT CANNOT BE CLAIMED THAT HE HAD SURPLUS FUNDS. THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE HAD ANY SURPLUS FUNDS, AFTER INVESTMENT IN FDR THE, ASSESSE E WAS NOT LEFT WITH ANY SURPLUS FUNDS AND TO THIS EXTENT THE SUBMISSIONS AR E AN INCORRECT PRESENTATION OF FACTS PER SE. III) THE NEXT ARGUMENT OF THE APPELLANT IS THAT HE PAID INTEREST ON THE OVERDRAFT OF RS. 3,61,605/- WHEREAS HE HAD DECLARED INTEREST EARNED AS INCOME OF RS. 17,25,644/- ON THE FDR. THE RATE OF I NTEREST RECEIVED ON FDR WAS 9.75% AND INTEREST RATE ON OD WAS 10.75% AND IT HAS BEEN CLAIMED THAT THE AMOUNT OF INTEREST PAID SHOULD BE SET OFF AGAINST THE INTEREST RECEIVED ON FDR. ONCE AGAIN THIS A SPURIOUS ARGUMEN T SINCE AN ALLOWANCE OF INTEREST PAID ON OD LIMIT AGAINST INTEREST RECEI VED CAN BE GIVEN U/S 57(III) ONLY WHEN A NEXUS IS ESTABLISHED BETWEEN EARNING OF INTEREST AND EXPENDITURE INCURRED ON EARNING OF THIS INTEREST. IN THE CASE OF APPELLANT NO SUCH NEXUS EXISTS BETWE EN THE INTEREST PAID ON OVERDRAFT FACILITY WHICH, WAS USED TO FINANCE HIS I NVESTMENT IN LP0 WHICH DID NOT BEAR A DIRECT NEXUS WITH THE EARNING OF INTERES T ON FDRS THEREFORE THE CLAIM OF INTEREST PAID CANNOT BE ALLOWED AS EXPENDI TURE AGAINST INTEREST INCOME EARNED U/S 57(III). THIS RATIONALE IS FURTHE R SUPPORTED BY THE FINDING OF HON. RAJASTHAN HIGH COURT IN THE CASE OF HAMENDR A SINGH VS. CIT 170 ITR 508 (RAJ). IN THE RETURN RELATING TO THE A.Y. 1970-71, THE ASS ESSEE DECLARED INCOME OF INTEREST TO THE EXTENT OF RS. 20,102/- OBTAINED FRO M VARIOUS FIXED DEPOSITS. HE TOOK LOANS FROM BANKS ON PLEDGING THE FIXED DEPOSIT RECEIPTS FOR CONSTRUCTING 6 HIS HOUSE AND PAID INTEREST OF RS. 14,740/- ON THE LOINS SO OBTAINED, INTEREST WAS PAID BY HIM AT A HIGHER RATE THAN THAT HE OBTA INED, FROM HIS .FIXED DEPOSITS AND RS. 3,800/- WAS PAID IN EXCESS AS INTE REST BY HIM. THE ASSESSING AUTHORITY DID NOT ALLOW THE INTEREST PAID ON LOANS AS DEDUCTION UNDER SECTION 47(III) OF IT ACT 1961. THIS WAS UPHELD B Y THE TRIBUNAL. ON A REFERENCE: HELD, THAT THE IMMEDIATE PURPOSE OF TAKING LOANS WA S TO CONSTRUCT A HOUSE. THE FACT THAT THE ASSESSEE TOOK LOANS ON THE SECURI TY OF HIS FIXED DEPOSITS IN BANKS IN ORDER TO MAINTAIN HIS INTEREST INCOME THER E FROM WAS IRRELEVANT' THE INTEREST PAID ON THE LOANS COULD NOT BE SAID TO BE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR EARNING INCOME FROM OTHE R SOURCES. HENCE, IT WAS NOT DEDUCTIBLE.' . THUS THE FACTS OF THE CASE ARE COVERED BY THE FINDI NG OF HON. JURISDICTIONAL HIGH COURT ABOVE IN SO FAR THAT SINCE THE EXPENDITU RE ON ACCOUNT OF HIGHER RATE OF INTEREST PAYMENT DOES NOT HAVE A DIRECT NE6 US IN THE EARNING OF THE INTEREST IT CANNOT BE ALLOWED AS EXPENDITURE U/S 57 (III). IV) IT IS PERTINENT TO NOTE THAT AR OF THE APPELLAN T HAS FAILED TO FURNISH SPECIFIC DETAILS IN SPITE OF REPEATED OPPORTUNITIES DURING THE APPELLATE PROCEEDINGS. FOR EXAMPLE IT HAS BEEN SUBMITTED THAT INVESTMENT IN IPO (AVERAGE PER MONTH) 2 LAKH' WAS MADE DURING THE YEA R, HOWEVER ON PERUSAL OF THE OVERDRAFT ACCOUNT SUBMITTED IT IS SEEN THAT RS. 26,40,550/- WAS WITHDRAWN FROM THIS ACCOUNT FOR INVESTMENT IPOS AND SHARES' THUS IT IS SEEN THAT THE APPELLANT HAS NOT BROUGHT CLARITY TO FACTS IN SPITE OF REPEATED OPPORTUNITY. SIMILARLY IN SPITE OF REPEATED OPPORTU NITY THE NEXUS BETWEEN INTEREST PAID ON ACCOUNT OF OVERDRAFT TAKEN FOR INV ESTMENT IN SHARES & IPOS AND INTEREST PAID ON OVERDRAFT TAKEN FOR ADVANCING LOANS ON INTEREST WAS NOT GIVEN AFTER REPEATED ADJOURNMENTS. V) THE VERY FACT THAT THE OD FACILITY USED TO GIVE ADVANCES TO PERSONS FROM WHOM HE HAS SHOWN INTEREST INCOME OF RS. 11,58,6551 - FURTHER AFFIRMS THE VIEW OF THE AO THAT THE INTEREST PAID ON ACCOUNT OF INVESTMENT IN IPOS AND SHARES FROM WHICH THE DIVIDEND INCOME WAS TAX FREE SHOULD BE DISALLOWED U/S 14A. VI) RELIANCE WAS PLACED ON THE CASES OF CIT VS. HER O CYCLES (2010) 233 CTR74 (P&H) 323 ITR 518 AND YATISH TRADING CO. P..L TD. VS. ACIT,(2011) 50 DTR 158 (MUN0.HOWEVER IT IS SEEN THAT THE FACTS OF THE CASES' RELIED ON 7 ARE DISTINCT FROM THE FACTS OF THE CASE OF THE APPE LLANT. IN THE CASE OF HERO CYCLES, THE NEXUS BETWEEN THE EXEMPT INCOME AND EXP ENDITURE WAS NOT ESTABLISHED WHEREAS IN THE CASE OF THE APPELLANT TH ERE IS A DIRECT NEXUS BETWEEN THE INTEREST PAID ON OVERDRAFT TAKEN FROM T HE BANK AND INVESTMENT MADE IN IPOS WHOSE DIVIDENDS WAS EXEMPT. SIMILARLY IN YATISH TRADING CO. P. LTD. IT HAS BEEN HELD THAT IN TRADING IN SHARES, THE DOMINANT OBJECT WAS TO EARN PROFIT AND DIVIDEND WAS ONLY INCIDENTAL AND THE SHARES ARE SECURITIES HELD AS ST OCK-IN-TRADE AND SHOULD NOT BE TAKEN AS INVESTMENT FOR THE PURPOSE OF DISAL LOWANCE U/S 14A. THE FACTS OF THE CASE OF THE APPELLANT ARE CLEARLY DIST INCT FROM THE FACTS OF YATISH TRADING CO. P. LTD. BECAUSE SHOWN AS STOCK-IN-TRADE IN P&L ACCOUNT AND BUT AS INVESTMENT IN BALANCE SHEET AND THAT IS WHY THE INCOME HAS BEEN TREATED AS CAPITAL GAIN AND NOT PROFIT FROM BUSINES S AND PROFESSION BY THE APPELLANT. IF THE INTENTION OF THE APPELLANT WAS NO T TO EARN THE DIVIDEND HE SHOULD HAVE SHOWN THE INCOME ON SALE OF SHARES AS P ROFIT FROM BUSINESS RATHER-THAN SHORT TERM CAPITAL GAINS, WHICH HAS NOT BEEN DONE CLEARLY ESTABLISHING THE INTENTION OF THE APPELLANT TO EARN DIVIDEND FROM THESE IPOS AND SHARES.' THEREFORE RELIANCE IS PLACED ON THE CHEMINVEST LTD. VS. ITO' IT IS HELD THAT SINCE THE APPELLANT FAILED TO DISCHARGE HIS ONUS OF PROVING EXACT NEXUS BETWEEN INTEREST PAID FOR INVESTMENT MADE IN IPOS, THE TOTAL DISALLOWANCE OF RS. 3,61,605/- OF INTEREST PAID ON OVERDRAFT FACILI TY WAS JUSTIFIED. IN VIEW OF THE ABOVE FACTS AND THE LAW APPLICABLE T O THESE FACTS THE DISALLOWANCE OF RS.3,61,605/- U/S14A IS UPHELD 2.4 FROM THE ABOVE FINDINGS OF THE LD CIT(A), IT BE COMES MANIFEST THAT AS PER HER, THE ASSESSEE HAS NOT BEEN ABLE TO PROVE TH E EXACT NEXUS BETWEEN THE INTEREST PAID FOR INVESTMENT MADE IN IPOS AND INTER EST RECEIVED ON FDRS AND THAT IS WHY THIS ADDITION HAS BEEN CONFIRMED. IT IS A FACT THAT THE ASSESSEE HAS PURCHASED FDRS BY USING HIS OWN FUNDS. AGAINST THE FDRS, THE BANK EXTENDED OD A/C FACILITY TO THE ASSESSEE. FROM THE BANK, THE ASSESSEE 8 RECEIVED INTEREST ON FDRS AMOUNTING TO RS. 17,25,64 4/- AND THE ASSESSEE HAS PAID INTEREST ON OD A/C OF RS. 3,61,605/-. IF WE CO RRELATE THESE TWO ACCOUNTS, THE NET RECEIPT OF THE YEAR IN THE HANDS OF THE ASS ESSEE COMES TO RS. 13,64,039/-. AS PER THE LD. AR, THE ASSESSEE HAS E ARNED INTEREST OF RS. 13,64,039/- ON HIS FUNDS. THE LD. AR HAS ARGUED AND HAS ALSO WRITTEN IN HIS WRITTEN SUBMISSIONS THAT DURING THE YEAR THE ASSESS EE HAS NOT OBTAINED ANY NEW OR FRESH LOAN AND HAD SUFFICIENT FUNDS WITH HI M. THE CASE OF THE A.O. IS THAT THE ASSESSEE UTILIZED THE OD A/C IN SHARE APPL ICATIONS AND AS SUCH THE INTEREST ON OD A/C IS NOT ALLOWABLE U/S 14A OF THE ACT. AS PER THE ASSESSEE, SECTION 14A APPLIES ON LOAN AMOUNT ON WHICH THE ASS ESSEE HAS PAID INTEREST. AFTER CONSIDERING THE RIVAL STANDS, WE HAVE FOUND T HAT THE ASSESSEE HAD HIS OWN FUNDS AND WAS FREE TO UTILIZE THE SAME IN ANY MANNER HE LIKED. HE COULD INVEST THEM IN SHARES DIRECTLY AND IN THAT CASE Q UESTION OF NO DISALLOWANCE OF INTEREST WOULD NOT ARISE. HERE THE ASSESSEE HAS ADOPTED DIFFERENT MODE AS AFTER MAKING FDRS OF HIS OWN FUNDS WITH THE BANK, H E HAS STARTED HAVING OD A/C. HE RECEIVED INTEREST ON FDRS AND PAID INTER EST ON OD A/C. WHICH ARE IN A WAY ARE INTERDEPENDENT. IN CASE THE ASSESSEE W ERE TO APPLY FOR SHARES FROM HIS OWN FUNDS NO MONEY OR LESSER FUNDS WOULD H AVE REMAINED TO BE DEPOSITED IN FDRS AND IN THAT CASE HE WOULD EARN LE SSER AMOUNT OF INTEREST. IN THAT VIEW OF THE MATTER, IT HAS BEEN CONTENDED THAT IN FACT THE ASSESSEE HAS 9 NOT OBTAINED ANY INTEREST BEARING LOAN FOR MAKING I NVESTMENT IN SHARES AND, THEREFORE, SECTION 14A OF THE ACT IS NOT ATTRACTED . THE THRUST OF THE LD. AR IS ON THE SUBMISSION THAT BY DEVISING THIS METHOD, THE ASSESSEE HAS EARNED LESSER INTEREST ON HIS OWN FUNDS BECAUSE PART OF TH E FUNDS HAS BEEN UTILIZED FOR INVESTMENT IN SHARES. IT WAS STATED THAT THE AS SESSEE HAS ALSO DISCLOSED THE INCOME OF RS. 28,85,524/- FROM OTHER SOURCES AND TH IS FACT HAS BEEN USED TO ESTABLISH THAT THE ASSESSEE HAD SURPLUS FUNDS ON WH ICH HE DID NOT PAY INTEREST. IT HAS BEEN FURTHER STATED BY THE LD. AR THAT EVEN IF INVESTMENT WAS MADE IN SHARE APPLICATION, THE SAME DID NOT AUTOMAT ICALLY INVITED DISALLOWANCE OF INTEREST BECAUSE INVESTMENT IN SHAR ES IS PRIMARILY MEANT FOR EARNING INCOME AND RECEIPT OF DIVIDEND IS INCIDENTA L THERETO. IT IS STATED THAT THE ASSESSEE HAS EARNED SHORT TERM CAPITAL GAIN OF RS. 2,54,823/- AND, THEREFORE, IT CANNOT BE STATED THAT OD AMOUNT HAS B EEN USED PURPOSEFULLY FOR EARNING EXEMPT INCOME. TO SUPPORT HIS CONTENTION, T HE LD. AR OF THE ASSESSEE HAS HEAVILY RELIED ON FOLLOWING DECISIONS. (I) CIT VS. HERO CYCLES (2010) 233 CTR 74 (P&H)/323 ITR 518 WHERE IT WAS FOUND THAT FOR EARNING EXEMPT INCOME N O EXPENDITURE WAS INCURRED DISALLOWANCE U/S 14A COULD NOT STAND. (II) YATISH TRADING CO. P. LTD. VS. ACIT (2011) 50 DTR 158 (MUM) IT WAS OBSERVED THAT THE EXPRESSION IN RELATION TO IN SECTION 14A MEANS DOMINANT AND IMMEDIATE CONNECTION OR NEXUS WI TH EXEMPT INCOME. AS IN CASE OF TRADER IN SHARES THE DOMINANT OBJECT IS TO EARN PROFIT AND DIVIDEND IS ONLY INCIDENTAL THE SHARES A RE SECURITIES HELD 10 AS STOCK IN TRADE AND SHALL NOT BE TAKEN AS INVESTM ENT FOR THE PURPOSE OF DISALLOWANCE U/S 14A. (III) S. BALAN SHANMUGAM VS DCIT 120 ITD 459 (PUNE) (IV) MINDA INVESTMENTS LTD. VS DCIT (2010) 52 DTR 1 (DEL TRIB) MERE BECAUSE THE ASSESSEE HAS INCURRED INTEREST EXP ENDITURE ON FUNDS BORROWED IN THE MAIN UNIT IT WOULD IPSO-FACTO NOT INVITE THE DISALLOWANCE UNDER SECTION 14A UNLESS THERE WAS EVI DENCE TO SHOW THAT SUCH INTEREST BEARING FUNDS HAVE BEEN INVESTED IN THE INVESTMENTS WHICH HAD GENERATED THE TAX EXEMPT DIVI DEND INCOME . (V) DCIT VS. MAHARASTRA SEAMLESS LTD. (2011) 52 DTR 5 (D EL TRIB) THE ASSESSING OFFICER DID NOT ESTABLISH ANY NEXUS B ETWEEN THE BORROWED FUNDS AND THE INVESTMENT IN TAX FREE BONDS . APPORTIONMENT ON A PRO-RATA BASIS WAS IMPROPER IN T HE ABSENCE OF ANYTHING BROUGHT BY THE ASSESSING OFFICER TO REBUT THE ASSESSEE STAND . 2.5 WE HAVE FOUND THAT THE ASSESSEE HAS UTILIZED OD FACILITY DURING THE YEAR MAINLY FOR ADVANCING THE MONEY TO VARIOUS PERS ONS FOR EARNING INTEREST AND THE ASSESSEE HAS ALSO EARNED INTEREST INCOME OF RS. 28,85,254/- FROM VARIOUS PERSONS INCLUDING ON KVPS AND FDRS. IT HAS NOT BEEN ESTABLISHED BY THE A.O. THAT THE ASSESSEE UTILIZED THE WITHDRAWALS FROM OD A/C IN IPO. THE ONLY AMOUNT OF RS. 2.00 LACS IS FOUND AS UTILIZED I N IPOS BUT IT IS ALSO A FACT THAT NO INVESTMENT IN SHARE HAS BEEN MADE DURING TH E YEAR. THE ASSESSEE HAS ALSO EARNED SHORT TERM CAPITAL GAIN INCOME OF RS. 2 ,54,823/- OUT OF THESE TRANSACTIONS WHICH ARE PART OF TAXABLE INCOME. WE ARE IN AGREEMENT WITH THE SUBMISSIONS OF THE LD. AR THAT OD LIMIT WAS MAINLY USED FOR THE PURPOSE OF MAKING ADVANCES TO OTHER PERSONS FROM WHOM THE ASSE SSEE RECEIVED INTEREST 11 WHICH IS ALSO PART OF TAXABLE INCOME. IT IS SEEN TH AT THE ASSESSEE HAS MADE INVESTMENT IN IPOS FROM HIS SAVING BANK ACCOUNT AND NOT BY USING THE OD A/C. THE FOLLOWING CHARTS DEPICTING THE UTILIZATION OF FUNDS AND WITHDRAWALS MADE DURING THE YEAR JUSTIFY THE CLAIM OF THE ASSES SEE. INTEREST PAYMENT OF OVER DRAFT 361605 SHORT TERM CAPITAL GAIN INCOME 254823 INTEREST FROM PARTIES 2885254 INVESTMENT IN IPO (AVERAGE PER MONTH) 200000 INVESTMENT IN SHARES 0 PARTICULARS RATE AMOUNT INTEREST RECEIVED ON FDR 9.75% 1725644 INTEREST PAID ON OD LIMIT 10.75% -361605 NET INCOME FROM BANK INTEREST (FDR INTEREST OD INTEREST PAID) 1364039 INTEREST CHARGED FROM DEBTORS 15% 1158655 SHORT TERM CAPITAL GAIN (IPO APPLICATION) 254823 TAX FREE INCOME (DIVIDEND) 44508 TAX FREE INCOME (LTCG) 705086 IT IS SEEN FROM THE ABOVE CHART THAT THE ASSESSEE U TILIZED OD LIMIT MAINLY FOR MAKING ADVANCES TO OTHERS AND TO EARN SHORT TERM CA PITAL GAIN WHICH IS MORE THAN THE EXPENDITURE AND IT ALSO FULFILL THE CONDIT ION OF SECTION 57(III) OF THE ACT. ACCORDING TO THIS SECTION, EXPENDITURE MUST BE MADE WHOLLY AND EXCLUSIVELY FOR EARNING INCOME AND THAT SUCH INCOME MUST HAVE BEEN EARNED. IT IS NOT THE CASE OF THE A.O. THAT THE LOAN FUNDS WERE UTILIZED FOR THE PURPOSE OF EARNING TAX FREE INCOME. BOTH THE A.O. AND THE LD CIT(A) HAVE NOT GIVEN 12 THEIR FACT FINDING CLEARLY ON THIS ISSUE AS DISCUSS ED ABOVE, OTHERWISE ALSO, AS PER THE SETTLED POSITION OF LAW WHERE INTEREST IS R ECEIVED ON FIXED DEPOSIT AND INTEREST IS PAID ON LOAN OBTAINED ON THE SECURITY O F THAT FIXED DEPOSIT, ONLY THE NET INTEREST IS CHARGEABLE TO TAX ON THE PRINCI PLE OF MUTUALITY. IN THIS REGARD, THE DECISION OF HON'BLE KERALA HIGH COURT I N THE CASE OF CIT VS DR. V.P. GOPINATHAN, 229 ITR 801 IS RELEVANT. THE DECIS ION OF HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF HAMENDRA SINGH VS CIT, 170 ITR 508 HAS ALSO BEEN RELIED ON BY THE LD DR . IN THAT CAS E, THE ASSESSEE DECLARED INCOME OF INTEREST OBTAINED ON FIXED DEPOSITS. HE T OOK LOANS FROM THE BANKS ON PLEDGING THE FIXED DEPOSITS RECEIPTS FOR CONSTRU CTING HIS HOUSE AND PAID INTEREST THEREON. ON THESE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE RAJASTHAN HIGH COURT HELD THAT IMMEDIATE PURPOSE OF TAKING LOANS WAS TO CONSTRUCT A HOUSE AND IN THAT VIEW OF THE MATTER, E VEN IF THE LOAN WAS TAKEN ON SECURITY OF HIS FDRS IN ORDER TO MAINTAIN HIS IN TEREST INCOME THEREFROM WAS IRRELEVANT. IT HAS BEEN HELD THAT INTEREST PAID ON THE LOANS COULD NOT BE SAID TO BE THE EXPENDITURE INCURRED WHOLLY AND EXCL USIVELY FOR EARNING INCOME FROM OTHER SOURCES. ON THE FIRST READING IT SEEMS THAT BECAUSE HIGHER RATE OF INTEREST WAS PAID ON THE LOANS IN THAT CASE AND ALSO IN THE CASE UNDER REFERENCE, THE RATIO OF THAT DECISION APPLIED. HOWE VER, IN THAT CASE THE LOAN WAS TAKEN FOR CONSTRUCTION OF HOUSE AND NOT FOR T HE PURPOSE OF EARNING 13 INCOME. IN THE GIVEN CASE, THE FACTS ARE ENTIRELY D IFFERENT. THE ASSESSEE HAD HIS OWN FUNDS WHICH HE UTILIZED IN SUCH A MANNER TH AT HE HAS EARNED NET INCOME FROM INTEREST AND BY NOT MAKING ANY FRESH IN VESTMENT IN IPOS BUT HAS EARNED INCOME ON CAPITAL GAIN AS DISCUSSED ABO VE. ACCORDINGLY, WE ARE LEFT WITH NO OPTION BUT TO HOLD THAT THIS ADDITION DESERVES TO BE DELETED. WE ORDER TO DELETE THIS ADDITION AND ALLOW THE APPEAL OF THE ASSESSEE ON MERITS. 3.1 THE LEGAL GROUND NO. 1 RAISED BY THE ASSESSEE WAS NOT PRESSED BY THE LD. AR AT THE TIME OF HEARING. HENCE, THE SAME IS D ISMISSED BEING NOT PRESSED. 4.0 IN THE RESULT, APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 05-0 3-2014. SD/- SD/- ( N.K. SAINI ) (HARI OM MARATHA ) ACCOUNTANT MEMBER JUDICIAL MEMBER *MISHRA COPY FORWARDED TO :- 1. SHRI SATISH AGARWAL, JAIPUR 2. THE DCIT, CENTRAL CIRCLE-3, JAIPUR 3. THE LD.CIT(A) 3. THE LD CIT 4. THE D/R 5. GUARD FILE (ITA NO.970/JP/2013) BY ORDER, AR ITAT, JAIPUR 14 15