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Facts
The assessee claimed a deduction of Rs. 31,92,000/- for interest expenses under Section 57 of the Income Tax Act. This was set off against interest income earned from bank deposits. The Assessing Officer disallowed the deduction, and the CIT(A) upheld this decision.
Held
The Tribunal held that the expenditure incurred for earning interest income is allowable as a deduction under Section 57. Despite the complex rotation of funds, the nexus between the borrowed loan and the interest income earned was established.
Key Issues
Whether interest expenditure incurred on loans is allowable as a deduction under Section 57 when set off against interest income earned from bank deposits, considering the complex fund flow involving a partnership firm.
Sections Cited
57, 143(2), 142(1), 10(2A), 80C, 80D, 56, 37, 57(iii)
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Income Tax Appellate Tribunal, “K(SMC
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of order dated 24/06/2024 passed by NFAC, Delhi for assessment year 2019-20 on following grounds of appeal :
1) That on the facts and in the circumstances of the case of the appellant and in law Ld. NFAC has erred in upholding the 2 ITA 3857/Mum/2024; A.Y. 2019-20 Jigar Nemichand Sanghavi Assessing Officer's contention of disallowing the deduction of Rs. 31,92,000/-clained by the appellant u/s. 57 of the Act. 2) That on the facts and in the circumstances of the case of the appellant and in law Ld. NFAC has erred in negating the submissions filed by the appellant duly substantiating the interest expenditure amounting to Rs. 31,92,000/-. 3) That on the facts and in the circumstances of the case of the appellant and in law Ld. NFAC has erred in ignoring the alternative submission raised by the appellant of deductible interest as per Section 37 of the Act. 4) That on the facts and in the circumstances of the case of the appellant and in law Ld. NFAC has erred in considering the genuine deductions of Rs. 50,000/- and Rs. 25,000/-claimed u/s. 80C and u/s. 80D of the Act. 5) That the impugned order being contrary to law, evidence, and facts of the case may kindly be set aside, amended, and modified in the light of the grounds of appeal enumerated above and the appellant be granted such relief as is called for on the facts and in the circumstances of the case of the appellant and in law. 6) That each of the grounds of appeal enumerated above is without prejudice to and independent of one another. 7) That the appellant craves leave to reserve to himself the right to add, to alter or amend any of the grounds of appeal before or at the end of the hearing and to produce such further evidence, documents, and papers as may be necessary.
Brief facts of the case are as under:
The assessee field the return of Income for the AY 2019-20 on 31/12/2019 declaring Income of Rs. 56,990/-. Subsequently the case was selected under scrutiny and accordingly notices u/s. 143(2) & 142(1) of the IT Act were issued to the assessee calling for certain details against which the assessee submitted the details, as called for.
3 ITA 3857/Mum/2024; A.Y. 2019-20 Jigar Nemichand Sanghavi 2.1 During the course of the assessment proceeding, the AO noticed that the assessee had claimed Interest expenses of Rs. 31,92,000/- u/s. 57 of the IT Act and accordingly AO asked for clarification. In response to the same the assessee submitted certain details however failed to convince the AO to allow the expenditure even when the relevant Income has been claimed as exempt u/s. 10(2A) of the IT Act (as claimed by the assessee profit received from the firm amounting to Rs.70,11,333/-). Subsequently the AO issued Show Cause notice and the Video Conference as well to the assessee and against the same the assessee submitted certain details. The Ld.AO was not satisfied with the same and the assessment was concluded making the following additions : • Disallowance of Rs. 31,92,000/- claimed as interest expenditure • Disallowance of Rs. 50,000/- claimed u/s. 80C and Rs. 25,000/- claimed u/s. 80D of the IT Act. Aggrieved by the same, the assessee has preferred this present appeal 3. Before the Ld.CITA the assessee submitted that Rs.27,87,627/- was received as interest income from the bank which was from the investment of the surplus amounts of the loans borrowed from several parties. He submitted that the said interest income was offered to tax by the assessee u/s.56 and therefore the internet expenditure claimed by the assessee is allowable as deduction u/s.57 of the act. The Ld.CIT(A) after considering the submissions observed and held as under :
4 ITA 3857/Mum/2024; A.Y. 2019-20 Jigar Nemichand Sanghavi “7.3 The details submitted by the appellant has been submitted perused, however the same are not acceptable for the following reasons: 7.3.1 During the course of the assessment proceeding, the AO contested that the even if the deposits in the banks (on which the Inertest Income was received of Rs. 27,87,672/-) was out of the said Loans borrowed, the Appellant failed to submit the reasonable and acceptable cause as to why the same investments were made by availing the loans at the higher interest rates. Even during the appellate proceeding itself, the appellant has failed to substantiate the same as the Interest from Bank of Rs. 27,87,672/- is not a small amount. The appellant failed to establish any nexus between the borrowed fund and the fund invested in bank. 7.3.2 During the course of the appellate proceeding, the appellant itself has submitted that the said loans were borrowed wholly and exclusively to make investment in the Firm Raksha Bullion from which the appellant has received profit during the year. The said statement is contradictory to appellant's own statement whererin the appellant had claimed "the interest expense of Rs.31.92.000/- is incurred wholly and exclusively for earning interest income of Rs.27.87.672/- as offered to tax under section 56 of the Act by your appellant" as how come the same borrowed loans has been used wholly and exclusively to earn two different type of Income. 7.3.3 During the course of the appellate proceeding, the appellant had relied upon the provisions of section 57(iii) of the IT Act in order to allow the interest expenditure, however it may be noted that the appellant has received 10(2A) exempt Income of Rs.70,11,333/- being profits from the firm Raksha Bullion. From the above discussion it is clear that the borrowed loans were taken for the investment in the above mentioned firm only for the business purpose. During the course of the appellate proceeding, the appellant has submitted the bank account statement in regard to prove its claim, however as noticed from the bank account statement, the appellant has been withdrawing huge amounts on daily basis from the Firm and further transferring back (full or in part) to the Firm account the next day. This shows that the appellant is using the firm money to generate the Interest Income and not the borrowed loan by himself as the same has been used to promote the business of the firm. This is possibly 5 ITA 3857/Mum/2024; A.Y. 2019-20 Jigar Nemichand Sanghavi due to firm holding Current Account wherein the 0% interest rate has been offered on the amount deposited and the appellant must have transferred the amount on daily basis to Saving account in order to earn some Interest Income. The documents submitted by the appellant and the bank account statement nowhere prove that the interest paid by the appellant towards the borrowed loans are direct expenditure to earn the Bank interest Income. Earning the Bank interest is merely a loophole provision by the appellant to withdraw the money from the firm account to his saving account on daily basis and the same is also not recorded in the books of accounts and not allowable. 7.3.4 The case laws relied upon by the appellant are in regard to the interest expenditure incurred towards earning the Income from other sources, however in the instant case the facts are entirely different as the borrowed loan(to whom Interest payment claimed as Interest Expenditure) are wholly and exclusively taken to invest in the Firm to promote the business as stated by the Appellant himself. 7.4 In view of above discussion, it is very clear that the appellant has not incurred the Interest Expenditure wholly and exclusively to earn the Interest from Bank but merely used the available amount in the firm account on daily basis to transfer in his bank account to earn the interest Income without even recording the same in the books of accounts. Therefore, the appellant's contention is not tenable and against the facts of the case. Accordingly, the appellant's contention in this regard is not allowable and these grounds of appeal raised by the appellant are dismissed.” Aggrieved by the order of the Ld.CIT(A) assessee is in appeal before this Tribunal.
4. The Ld.AR submitted that, during the year under consideration, the assessee claimed deduction of Rs.31,92,000/- as interest expense under section 57 of the Act and the same was set off against interest income of Rs.28,77,987/-under the head income from other sources.
5. The Ld.AR submitted breakup of parties to whom interest was paid.
6 ITA 3857/Mum/2024; A.Y. 2019-20 Jigar Nemichand Sanghavi Name of party from Amount of loan Interest whom loan was taken Outstanding as on 31/03/2019 Raj Impex 56,00,000 6,00,000 Mutha Impex 28,00,000 3,00,000 Krishi Enterprises 56,00,000 6,00,000 Dashrath 28,00,000 3,00,000 Dhaneshwarpras Ratnaben Jain 16,00,000 1,92,000 DR Enterprise 56,00,000 6,00,000 Atul Jain HUF 56,00,000 6,00,000 Total 31,92,000 5.1 Copies of confirmation of accounts of the abovementioned parties for the year ended 31/03/2019 was produced before the Ld. A.O as documentary evidence to substantiate the claim for deduction of interest.
She then submitted that, for the year under consideration assessee earned SB interest of Rs.27,87,672/- from Kotak Mahindra Bank. It is submitted that, the said interest was earned on the surplus fund parked by the firm where the assessee is a partner. It is submitted that, the surplus fund is transferred by the firm to the assessee FD account and on the next day the same is withdrawn. As assessee’s bank was offering a higher rate of interest on the savings bank account even for a single day. The assessee thus treated the said interest income to be exclusively out of the funds of the partnership exclusively from out of the funds of the partnership and thus concluded that interest expenses of Rs. 31,92,000/- could be set off against the interest income of Rs. 27,627/- u/s. 56 of the Act. The Ld.AR prayed for the claim to be allowed. 6.1 On the contrary the Ld.DR submitted that, both these interests have different character and therefore cannot be set off 7 ITA 3857/Mum/2024; A.Y. 2019-20 Jigar Nemichand Sanghavi against each other. The Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advance by both sides in the light of record placed before us.
It is noted that, the Ld.AO denied deduction u/s.57 on the ground that there is no nexus with the interest earned while adding so, the Ld.AO did not consider the fact that the interest income against which the assessee claimed expenditure arises out of the surplus funds lying in the SB A/c. of the assessee/ FD placed out of loans.
As per the mandate of sec.57, the any expenditure incurred for the purpose of earning such income should be allowed as a deduction. As there is no dispute regarding the nexus the deduction claimed cannot be denied merely on the ground that the assessee rotation the loan for introduction and withdrawal in the partnership firm.
Before parting it is made clear that the above view taken is based on peculiar facts that is unique to the assessee before us and therefore cannot be referred as a precedent in any other case. Accordingly the grounds raised
by the assessee is allowed. In the result the appeal filed by the assessee allowed. Order pronounced in the open court on 25/08/2025 Sd/- Sd/- (GIRISH AGRAWAL) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated: 25/08/2025
8. ITA 3857/Mum/2024; A.Y. 2019-20 Jigar Nemichand Sanghavi Poonam Mirashi, Stenographer Copy of the order forwarded to:
(1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T.