Raj Kumari Agarwal vs. DCIT ITAT, Agra Pramod Kumar (A.M.) and Joginder Singh (J.M.) I.T.A. No.: 176/Agra/2013 Assessment Year: 2008-09. Decided on July 18th, 2014 Counsel for Assessee/Revenue: Arvind Kumar Bansal/S D Sharma

Facts:
During the course of the assessment proceedings, the AO noticed that the assessee had made a fixed deposit of Rs. 1 crore with abank and earned interest of Rs 11.78 lakh thereon. However, whilecomputing the income from other sources, the assessee claimed a deduction of Rs. 4.37 lakh on account of interest paid on loan of Rs 75 lakh taken on the securityof deposits. When asked to justify this deduction, the assessee submitted that she needed her funds, as she had to give money to her son and with a view toavoid premature encashment of the fixed deposits, which wouldhave resulted in net loss to her, she took a loan against fixed deposit so as to keepthe fixed deposit intact and earn the interest income thereon. It was contended thatthe interest of Rs. 4.37 lakh paid on the borrowings from the Bank against security of fixed deposit, was thus made for the purpose of earning FDR interest. The AO rejected the claim of deduction observing that interest onloan has not been laid out or expended wholly and exclusively for the purpose ofmaking or earning income from FDR. On appeal the CIT(A) upheld the order of the AO.

Before the Tribunal, the assessee also justified her claim with the working showing that she has returned higher interest income of Rs. 7.41 lakh (Rs. 11.78 lakh minus Rs. 4.37 lakh paid) while if she had encashed the FDR then the interest income from FDR would had beenat lower sum of Rs. 5.38 lakh.

Held:
According to the Tribunal, the question that needs to be adjudicated was whether interest paid can be said to have been incurred “wholly and exclusively” for the purpose of earning interest income from fixed deposits.For this purpose, it referred to a decision by the coordinate bench of its own Tribunal in the case of AjaySingh Deol vs. JCIT [(91 ITD 196). Relying thereon, it observed 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 (emphasis supplied). According to it, 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 deposit, so as to keep the source of earning intact, the expenditure so incurred is wholly and exclusively to earn the fixed deposit interest income. It further observed that 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, according to the tribunal was an expenditure incurred wholly and exclusively for earning from interest on fixed deposits.