Delhi High Court
The Commissioner Of Income Tax vs M/S Taj International Jewellers on 13 December, 2010
Author: A.K.Sikri
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.ITA 985/2010
&
ITA NO.1316/2010
% Date of order:13th December, 2010.
(1) ITA No.ITA 985/2010 & CM APPL. 13061/2010
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
Through : Ms. Prem Lata Bansal,
Advocate
VERSUS
M/S TAJ INTERNATIONAL JEWELLERS ....RESPONDENT
Through: Mr. S. Krishnan, Advocate
(2) ITA NO.1316/2010
THE COMMISSIONER OF INCOME TAX . . . APPELLANT
Through : Ms. Prem Lata Bansal,
Advocate
VERSUS
M/S TAJ INTERNATIONAL JEWELLERS ....RESPONDENT
Through: Mr. S. Krishnan, Advocate
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE SURESH KAIT
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J. (ORAL)
1. The assessee herein is in the business of export of jewellery.
In these two assessment years namely 2005-06 and 2006-07, it was
found by the Assessing Officer that the assessee had taken a huge
amount as loan on which interest was paid. It was also found that the
assessee had converted the said loans in the FDRs and interest was
received on the said FDRs. It so happened that the interest earned on
the FDRs was more than the interest which the assessee paid on the
loans. The assessee had shown the interest earned on FDRs as „income
from other sources‟. However, at the same time, the interest which was
paid by the assessee to the bank on the loans was reduced from the
interest earned on the FDRs. In this manner, netting of the interest was
done by the assessee and the income shown under the head „income
from other sources‟. The Assessing Officer, however, disallowed the
interest paid by the assessee to the banks on the borrowed amount on
the ground that the loan was borrowed for business purpose and
interest paid thereon should not be netted against the interest earned
on the FDRs but should be allowed as deduction while computing the
income from the head of „income from business‟. The assessee filed an
appeal against this order before the CIT (A) which deleted the addition
and allowed the deduction of interest paid by the assessee to the bank
on the borrowed funds under Section 57 (iii) of the Income-Tax Act. This
order of the CIT (A) has been affirmed by the Tribunal.
2. In order to deal with this issue one will have to go in the peculiar
nature of transaction entered into by the assessee. The assessee had
given its detailed explanation to the Assessing Officer, inter alia, stating
that it had borrowed a sum of ` 35.34 crores directly from the banks to
make the FDRs i.e. to say on the one hand, Bank advanced loan to the
assessee and on the other hand, the same amount was converted into
FDR‟s. The assessee had further explained that it did not invest fresh
capital in the years in question. More so, the activity of import of gold
on 360 days credit against letter of credit was permitted by the
Government of India as per Import & Export Policy for the benefit of
Exporters. The Exporters were benefitted by scheme purely on the facts
that there was a difference of rate of interest in India as against interest
rate outside India which was payable i.e.LIBOR rate (London Inter Bank
Rate). It was because of this peculiar nature of the transaction and the
scheme of Government of India for the benefit of Exporters that the
assessee earned more interest on the FDRs than the interest payable to
the bank on the borrowed funds. It is not in dispute that the assessee
intends to pay the tax on the extra interest earned on the said FDRs,
what the assessee wanted to adjust there from the interest paid by it to
the Bank against the borrowed funds. Section 57 (iii) of the Act reads as
under:-
"any other 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"
3. The CIT (A) as well as ITAT have recorded a finding of fact that
there was a clear nexus between the interest earned on the FDRs and
the interest paid on loans utilized for purchase of FDRs and the intimate
connection between the receipt and payment of interest stand
established. It is not in dispute that the entire money was borrowed
with the sole purpose of converting the same into FDRs and that was
actually done as well. In these circumstances, we are agree with the
opinion of the authorities below. The interest paid had to be allowed
under the provisions of Section 57 (iii) of the Act as the amount was
borrowed for making and earning income, taking advantage of the EXIM
policy of the Government of India as well as lower LIBOR interest rate.
4. Therefore, we are of the view that no substantial question of law
arises in the aforesaid background and these appeals are accordingly
dismissed.
A.K. SIKRI, J.
SURESH KAIT, J.
DECEMBER 13, 2010
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