HEMRAJ JAIN,JAIPUR vs. DCIT, CIRCLE 1, JAIPUR

Under the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the disallowance made by ld. AO in respect of interest expense to the extent of Rs. 24,47,227/-, out of interest of Rs. 85,23,549/- claimed u/s 57 against interest income of Rs.60,76,322/-, by holding that the appellant has claimed excess interest without demonstrating justification for excess expense of Rs. 24,47,227/- with supporting evidence.

Under the facts and circumstances of the case, the ld. CIT(A) has erred in sustaining disallowance of Rs. 24,47,727/- instead of Rs. 23,87,944/-as submission of appellant in respect interest income of Rs. 59,783/- from FDR and pension has been accepted by him. 4. The assessee craves leave to add, alter or amend any of the grounds of appeal.

In this case, the Assessing Officer (in short, “the AO”) noted that the assessee had borrowed funds on payment of interest and further utilized the same for earning of interest income. He noted that the total loan liability of the assessee was shown at Rs.28,74,31,053/-, out of which an amount of Rs.16,12,15,984/- has been shown to have been utilized in his own business, namely M/s Anu Trading Company, and the balance amount of loan amounting to Rs. 12,62,15,069/- had been shown as loans taken in his personal name, which were used for giving loans to various parties for earning interest income. The Ld. AO further noted that the interest of Rs. 17,82,478/- had been shown as having been received from his own proprietary concern, M/s Anu Trading Company, and the interest from other parties had been shown at Rs. 42,93,844/-. The interest received from his own business concern, amounting to Rs. 17,82,478/-, though shown under the head “income from other sources”, was liable to be considered under business income as the funds were used for business purposes. The AO further observed

During the assessment proceedings, the assessee explained that the assessee had earned total interest income of Rs.80,61,427/-, which includes Rs.42,93,844/- from other parties, Rs.17,82,478/- from business concern of the assessee namely M/s Anu Trading Company ; Rs.19,25,293/- from partnership firm and of Rs.59,783/- from FDR, pension plan etc. The assessee submitted that the borrowed amount was also used for capital contribution in the partnership firm as well as for making the FDR from which interest income was earned; however, the income from partnership firm was returned as business income, whereas the interest income was shown as ‘Income from other sources’. However, the AO rejected the aforesaid contention of the assessee summarily stating that it is an afterthought as the assessee earlier had not so pleaded in its reply.

We note that neither the AO nor the Ld. CIT(A) have properly looked into and appreciated the aforesaid contentions of the assessee. The assessee has given factual details of investment of borrowed funds for earning of interest income from partnership firm as well as FDR, which details are required to be factually examined by the AO. Therefore, the impugned order of Ld. CIT(A) is set aside and matter is restored to the file of the Assessing Officer with a direction to examine the aforesaid contentions of the assessee and, if it is found that borrowed funds were used for investment in FDRs whereupon, the interest income was earned, the assessee will be entitled to set off of the same against the interest expenditure. However, so far as the interest income earned by the assessee from Partnership firm is concerned, we note that as per the relevant provisions, the same is to be treated as business income of the assessee. Now the question as to the interest paid on the amount borrowed for introduction of capital into the partnership firm, will be allowable as deduction against the business income of the assessee (though, in the shape of interest income) is a debatable issue, which need to be examined at the hands of the AO in the light of relevant case laws. As the ld. AR has requested that the entire factual details need to be examined at the hands of the AO, this issue is also accordingly restored to the file of the AO for decision a fresh in accordance with law.