The Mumbai bench of Income Tax Appellate Tribunal ( ITAT ) upheld the disallowance of expenditure incurred out of interest income pertaining to various funds held by the National Bank for Agriculture & Rural Development ( NABARD ) on behalf of the Government of India ( GOI ).
The Assessee National Bank for Agriculture & Rural Development is engaged in development of agricultural and rural activities throughout the Country. Its business consisted of providing and regulating credit to agricultural and rural areas, providing grants, subsidies and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, rural infrastructure, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promote rural development in an integrated way.
During the assessment proceedings the AO noticed that the assessee had claimed interest expenditure attributable to funds, such as RIDF, STCRC, ST RRB Credit Refinance Fund etc. The reason given by the assessee is that these funds actually belong to Government of India and it is holding them in fiduciary capacity on behalf of GOI. The interest expenditure so claimed was credited to Watershed Development Fund (WDF), Tribal Development Fund (TDF) etc.
Aggrieved by the order the assessee filed an appeal before the CIT(A) who allowed the appeal. Therefore the revenue filed another appeal before the tribunal.
Jehangir D. Mistry, the counsel for assessee submitted that the GOI will direct the assessee to spend out of WDF/TDF for specific purposes and the assessee shall act according to the said direction. The assessee has also stated that these funds are kept invested in Government Securities.
S. Srinivasu,counsel for revenue supported the order of the assessing officer submitted that the e deduction of expenses cannot exceed the amount of interest expenditure debited to the profit and loss account in respect of these funds.
It was viewed by the tribunal from the earlier decision that interest expenditure claimed by the assessee is actually diversion of interest income attributable to the above said funds at source. Hence the deduction claimed by the assessee was held to be allowable.
However the undisputed fact is that all these funds have been created out of the interest expenditure claimed by the assessee in respect of various funds like RIDF, STCRC etc.
Further observed that in respect of various funds like WDF, TDF etc., the assessee has made provision for interest expenses and claimed the same as expenditure in the Profit and Loss account. However, while computing total income for income tax purposes, the above said interest expenditure was disallowed voluntarily.
After reviewing the facts the ITAT bench of Justice (Retd.) C.V. Bhadang, ( President)and B.R. Baskaran,(Accountant Member) observed that The expenditure claimed by the assessee relates to these funds, which have been held by the assessee in fiduciary capacity. Hence the assessee is constrained to spend money in respect of these funds as per the directions given by GOI.
Moreover the bench concluded that the assessee has investing amounts belonging to WDF, TDF and like funds in Government securities, i.e., it is not using these amounts for its own business. Hence the assessee could not have claimed interest expenditure at all in respect of these funds, since these funds have not been used by the assessee for its own business purposes, but was invested in Government securities.
Therefore the bench upheld the disallowance of expenditure incurred out of interest income pertaining to various funds held by the National Bank for Agriculture & Rural Development ( NABARD ) on behalf of the Government of India ( GOI ).
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