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Facts
The assessee claimed interest expenses of Rs. 30,90,636/- under Section 57(iii) against interest income earned from funds acquired through a mortgage loan. The Assessing Officer (AO) and CIT(A) disallowed this, treating it as a House Building Loan (HBL) and stating that interest should only be adjusted under Section 24(b) against House Property income. The assessee contended a direct nexus between the interest paid on the loan and the interest earned from the subsequent investment.
Held
The Tribunal found a clear nexus between the interest paid on the loan and the interest income earned, as the borrowed funds were directly utilized for earning interest income. Following the precedent of *CIT v. Taj International Jewellers*, the Tribunal held that the interest expenditure was incurred wholly and exclusively for earning taxable interest income, thus allowable under Section 57(iii) of the Income-tax Act. The addition made by the AO was deleted.
Key Issues
Whether interest paid on a loan, even if originally for housing, can be claimed as a deduction under Section 57(iii) if the borrowed funds are directly utilized to earn interest income, establishing a direct nexus between the expenditure and income.
Sections Cited
250, 143(3), 57(iii), 24(b)
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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI ANIKESH BANERJEE & SHRI PRABHASH SHANKAR
O R D E R Per: Anikesh Banerjee (JM): The instant appeal of the assessee was filed against the order of the Learned Commissioner of Income-tax (Appeal) / Addl / JCIT(A), Thiruvananthapuram [in short, Ld.CIT(A)] passed under section 250 of the Income-tax Act, 1961 for A.Y. 2017-18, date of order 02/07/2025. The impugned order emanated from the order of the Learned Assistant Commissioner of
The brief facts of the case is that the assessee filed the return of income declaring total income of Rs.1,63,15,690/-. The assessment was framed u/s 143(3) determining the total income at Rs.1,94,06,330/- by disallowing of interest u/s 57(iii) of the Act. The assessee, in computation of income has claimed interest expenses amount to Rs.30,90,636/- against the interest received amount to Rs.29,65,083/- and Rs.1,25,553/- from M/s Premier Industrial Corporation Ltd and banks respectively. The interest expenses are incurred out of loan taken against the property. The said property was acquired by the assessee on 25/04/2016 from assessee’s own fund. After acquiring the said property, the assessee raised funds through a mortgage loan providing the same security. The sums so received by the assessee was transferred to the company’s account directly and from which the assessee haws earned interest income of Rs.29,65,083/- which was duly adjusted with the interest paid to the bank. The Ld.AO in assessment proceedings rejected the interest expenses and treated this interest as a house building loan interest which will be adjusted u/s 24(b) but not u/s 57(iii) of the Act. The aggrieved assessee filed an appeal before the CIT(A). The Ld.CIT(A), in his order stated that the nature of loan was HBL and the interest on HBL will be adjusted with the House Property income. On the other hand, the assessee claimed that the said fund was directly paid to the loan debtors and the interest was earned. So, there is direct nexus with the investment and the loan is proved. So the interest earning and interest expenses is duly eligible for adjustment. The
We have heard the rival submissions and perused the documents available on record. The Ld. AR submitted that the assessee had obtained a loan from the Bank of Baroda and the loan amount was directly disbursed to the loan creditors. A copy of the sanction letter dated 08/06/2016 issued by the Bank of Baroda is placed on record. Upon perusal of the sanction letter, we find that the bank had directly paid the sanctioned loan amount to the said loan creditor, and the rate of interest determined by the bank was 9.9%. The Ld. AR further submitted that the purpose of the loan is material for determining its nature, and in the present case, the nature of investment is minimal. He also drew our attention to the “Frequently Asked Questions” (FAQ) issued by the CBDT, wherein the following clarification is provided: “Q: Can interest paid on loans taken from friends and relatives be claimed as deduction while calculating House Property Income? Ans: Yes, if the loan is taken for the purchase, construction, repair, renewal or re-construction of the house. If the loan is taken for personal or other purposes, the interest on such loan cannot be claimed as deduction.”
The Ld. DR argued that the HBL (Housing Building Loan) is in the nature of a government subsidy. Therefore, shifting the loan utilization from one head to another cannot permit the assessee to set off interest paid against income from another head. According to him, HBL interest is allowable only against income from house property. He stands in favour of the orders of the revenue authorities.
Arvind Chhotalal Morzaria 5. In our considered view, we find that the assessee was granted the loan specifically for the purpose of housing. The nature and purpose of the loan are clearly and conclusively determined by the bank. On perusal of the sanction letter, it is evident that the bank directly disbursed the loan amount to the concerned entity. There is no dispute that a direct nexus exists between the interest earned from the loan and the interest paid on the same fund. A plain reading of section 57(iii) of the Act provides: “57... (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.” Further, the CBDT FAQ clarifies that if a loan is taken for purchase, construction, repair, or renewal of a property, the interest thereon is allowable as deduction under section 24(b). However, in the present case, the borrowed funds were directly utilized for earning interest income other than under the head “Income from House Property.” Therefore, the interest paid on such borrowed funds squarely falls within the ambit of section 57(iii), since the expenditure was wholly incurred for earning taxable interest income. The Ld. AR has also respectfully placed reliance on the judgment of the Hon’ble Delhi High Court in CIT v. Taj International Jewellers (2012) 20 taxmann.com 1 (Del), wherein the Hon’ble Court held: “3. The Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal have recorded a finding of fact that there was a clear nexus between the interest earned on the FDRs and the interest paid on loans utilized for purchase of FDRs and the intimate connection between the receipt and payment of interest stands established. It is not in dispute that the entire money was borrowed with the sole purpose of converting the same into FDRs 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 Arvind Chhotalal Morzaria 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.”
In view of the above legal position, we find that the purpose of the loan and its utilization is clearly established, and the nexus between the earning of interest and payment of interest is duly proved. Respectfully following the decision of the Hon’ble Delhi High Court in Taj International Jewellers (supra), we hold that the assessee is entitled to claim deduction of interest under section 57(iii) of the Act. Accordingly, the addition of Rs.30,90,636/- made by the Ld. AO is deleted.