Full Judgment
Briefly stated, the facts of the case are that the assessee has received gross interest of Rs. 2,15,531 in assessment year 1989-90, Rs. 2,62,026 in assessment year 1990-91, Rs. 29,95,037 in assessment year 1992-93 and Rs. 9,13,595 in assessment year 1993-94. It was claimed by the assessee that the interest income is assessable under the head 'Income from business' in all these four years; whereas, the assessing officer assessed the same under the head 'Income from other sources' by excluding the same from business income. On appeal, it was held by the learned CIT (A) that the interest income is assessable under the head 'Income from other sources'; but since, interest bearing borrowed funds were utilised for earning this interest income, interest paid on borrowed funds should also be taken out from business expenditure and should be set off against interest income under section 57(iii) against interest income assessable under section 56. Now, the revenue is in appeal against this direction of the learned CIT (A).
At the very outset, it was contended by the learned authorised representative of the assessee that this issue is fully covered by the Tribunal order in assessee's own case as per ITA Nos. 1899, 1900 & 1901 /Mum./99 dated 16-6-2004 for assessment years 1994-95 to 1996-97, copy of which was submitted and kept on record. Reliance was also placed on another Tribunal order in the case of Dy. CIT v. K.P. Sanghvi (IT Appeal Nos. 1092 & 1903 (Mum.) of 1999) copy of which was also submitted and kept on record. It was submitted that in both these Tribunal orders, the issue was set aside to the assessing officer with a direction to rework out the deduction under section 80HHC of the Act in the light of the Tribunal orders in the case of Dy. CIT v. Diamond Creek (2002) 82 ITD 291 (Mum.) and the order of the Special Bench of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT (2004) 89 ITD 25 (Del). It was contended that in the present appeals also, the issue should be set aside with similar directions to the assessing officer.
As against this, it was contended by the learned Departmental Representative of the revenue that a categorical finding has been given by the learned CIT (A) in his order for assessment year 1989-90 that the interest income earned by the assessee is assessable under the head 'Income from other sources'; and the same is followed by him in remaining three years and, therefore, the entire income has to be excluded from business income for the purpose of calculating deduction under section 80HHC. Regarding interest expenditure, it was contended by him that the same should be considered a., business expenditure and no set off should be allowed under section 57(iii).
We have considered the rival submissions and perused the materials or record. We find that there are two issues involved in this case, i.e., whether the interest income is assessable under the head 'Business income' a under the head 'Income from other sources' and whether the interest expenditure is allowable as deduction under section 57(iii) if the interest income is held to be assessable as income from other sources. Regarding the first issue, we find that the learned CIT (A) has decided and held that the interest income in the case of assessee is assessable under the head 'Income from other sources' and the assessee is not in appeal against this finding of the learned CIT (A); and therefore, this issue has become final and accordingly, we hold that interest income of the assessee in all these four years is assessable under the head 'Income from other sources'. Regarding the claim of the assessee that interest expenses should also be excluded from business expenses and should be deducted under section 57(iii) from the interest income being assessed under the head 'Income from other sources'; we find that the claim of the assessee is genuine if the assessee can establish that the interest expenses were incurred wholly and exclusively for the purpose of earning interest income as per provisions of section 57(iii). In both the Tribunal orders also, i.e., in the case of Diamond Creek (supra) and in the case of Lalsons Enterprises (supra), it was held by the Tribunal that interest expenditure can be set off against interest income only if the assessee can prove and establish that borrowed money was utilized for earning interest income and this burden is upon the assessee to establish that borrowed money is utilized for giving advances on which the interest was received. We find that learned CIT (A) has allowed deduction of interest expenditure under section 57(iii) without examining this aspect that the borrowed funds were utilized for earning interest income; and therefore, in the interest of justice, we are of the considered opinion that this matter should go back to the file of the assessing officer to examine this aspect of the issue and then decide the issue afresh and therefore we set aside the orders of learned CIT (A) on this issue and restore the matter back to the file of the assessing officer with direction to examine the claim of the assessee that interest expenditure was incurred for earning this interest income and with further direction to allow set off of interest paid, which has a nexus with interest receipt and accordingly assess the net interest income under the head 'Income from other sources' and exclude that portion of interest expenditure from business expenditure which has nexus with interest receipt and accordingly recomputed the deduction under section 80HHC and pass necessary order as per law after providing reasonable opportunity of being heard to the assessee.
In the result, all these appeals of the revenue stands allowed for statistical purposes.