Interest Expense incurred to earn Interest Income is allowable – Section 57(iii)

AO Must refer valuation to DVO if assessee claims that actual market value of the land or building is less than stamp duty valuation

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.

Interest Expense incurred to earn Interest Income is allowable – Section 57(iii)

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.

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.

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.

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.