PERSONAL TAX: Adjust interest cost against investment

The taxman can levy penalty for concealment of income or furnishing inaccurate particulars of income in the tax returns. Under the Income Tax Act ('the Act'), it is the prerogative of the tax officer to determine whether any omission or wrongly claimed deduction can be the subject matter for levy of penalty on the taxpayer.

In this week's case, a taxpayer availed of an overdraft facility from a public sector bank. Out of the funds borrowed from the overdraft account, he made investments in Reserve Bank of India's taxable bonds and fixed deposits. During the assessment year 2009-10, in his return of income, the taxpayer set off the interest expenditure incurred on account of funds borrowed from the overdraft account against the interest income earned from the taxable bonds and fixed deposits. During the course of assessment, the tax officer disallowed this claim made by the taxpayer.

Further, the tax officer also added an amount on account of notional income from house property under the deeming provisions of the Act in respect of two self-occupied properties held by the taxpayer. Similar position on both counts was taken by the tax officer for the assessment year 2011-12, too. Based on the additions made in the assessment orders for the above referred two assessment years, the tax officer also initiated proceedings for levying penalty in both the assessment years. In response to these proceedings, although the taxpayer furnished explanations objecting to the imposition of penalty, the tax officer rejected the explanation and levied penalty.

The taxpayer preferred an appeal against the penalty orders before the first appellate authority, who too confirmed the penalty orders for both years.

When the matter came up for hearing before the tax tribunal, the taxpayer submitted that his claim for the interest expenditure against the income earned from taxable bonds and deposits was on account of the provisions under Section 57 of the Act. This section provides for making certain deductions from the income chargeable under the head 'Income from other Sources'. One of the clauses under this section provides that any expenditure incurred or expended wholly and exclusively for the purpose of making or earning such income that is offered to tax under the head 'Income from other sources', the same shall be allowed as a deduction. The taxpayer argued that as he had utilised the amount withdrawn from the overdraft facility for making investments in the taxable bonds; he was of the view that the interest paid on the overdraft facility can be claimed as an expenditure against the interest earned from the said investments.

Based on the facts of the case, the tribunal observed that the taxpayer had claimed the above expenditure under the bonafide belief of such expenditure being allowed against income earned from investments made out of borrowed funds. Hence this can neither lead to furnishing of inaccurate particulars of income nor concealment of income.

In connection to the imposition of penalty, on the addition made on account of notional house property income, the tribunal observed that in reality the taxpayer has not earned any income from house property. In view of the above, penalty cannot be imposed in respect of addition made on account of notional income from house property.

The tribunal accordingly ordered for deletion of penalty under both grounds and ruled in favor of the taxpayer.

The writer is a Sebi-registered investment