Where the assesse has made the FDR out of borrowed funds, the interest on such FDRs cannot be added back by invoking the provisions of section 57(iii) of the Income Tax Act, 1961 – ITAT Delhi

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Crux : Where the assesse has made the FDR out of borrowed funds, the interest on such FDRs cannot be added back by invoking the provisions of section 57(iii) of the Income Tax Act, 1961

 

Case Details :  Late Shri D.K. Jain vs ACIT

 ITA 5350/Del/2016 (Order dated 12.12.2019)

 

In Favour of –ASSESSEE

 

Facts of the Case – AY 2011-12

 

  1. The assessee is an individual having income from salaries, income from house property and income from other sources.
  2. The assessee filed his return of income on 26.9.2011 declaring income of Rs. 66,61,683/-
  3. On selection of case for scrutiny, notice u/s. 143(2) of the Act was issued on 11.9.2012 and duly served. The Assessee submits written submission and required details.
  4. After considering the same, the AO assessed the income of the assessee at Rs. 81,25,520/- thereby making an addition of Rs. 14,63,837/- to the returned income on account of disallowance u/s. 14A of the Act on the presumptions certain expenses have been incurred to earn the exempt income vide order dated 20.03.2014 passed u/s. 143(3) of the Act.
  5. Against the assessment order, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 27.7.2016 has enhanced disallowance from Rs. 14,63,887/- to Rs. 53,17,653/- representing interest paid on overdraft facility availed from banks and eligible for deduction u/s,. 57(iii) of the Act.

 

 Findings &Discussions:  

 

  1. On Addition made u/s 14A by the Assessing Officer:

The Assesee is an individual and as such the investments are being made by him in the individual capacity. Accordingly, no disallowance on account of administrative expenses is called for. Therefore, the entire addition in dispute made u/s. 14A of the Act is directed to be deleted.

  1. On Disallowance of Interest u/s 57 (iii) of the Income Tax Act, 1961
  2. It has come to notice that the assessee took the overdraft and from that he made the FDR on which it has earned interest.
  3. Thus the interest has been paid on overdraft from the bank is an expenditure incurred to earn income on FDR from bank
  4. Accordingly, the finding of the Ld. CIT(A) that FDR has not come out of the borrowed funds is not correct
  5. In view of this fact, we are of the considered view that the enhancement made by the Ld. CIT(A) is not tenable in the eyes of law and therefore, we direct to delete the same.
Conclusion:

 

Hence, it can be said that where the assesse had earned certain interest income on FDRs which is created out of borrowed funds from the Banks. Thus the interest has been paid on overdraft from the bank is an expenditure incurred to earn income on FDR from bank.

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