COMMISSIONER OF INCOME TAX Vs. TAJ INTERNATIONAL

JUDGEMENT

(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 AO 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 FD Rs and interest was received on the said FD Rs. It so happened that the interest earned on the FD Rs was more than the interest which the Assessee paid on the loans. The Assessee had shown the interest earned on FD Rs 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 FD Rs. In this manner, netting of the interest was done by the Assessee and the income shown under the head Income from other sources. The AO, 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 FD Rs 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 IT 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 AO, inter alia, stating that it had borrowed a sum of Rs. 35.34 crores directly from the banks to make the FD Rs 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 FD Rs. 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 and 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 FD Rs 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 FD Rs, 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:

(3.) The CIT (A) as well as Tribunal have recorded a finding of fact that there was a clear nexus between the interest earned on the FD Rs and the interest paid on loans utilized for purchase of FD Rs 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 FD Rs and that was actually done as well. In these circumstances, we 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.