Loading judgment…
Facts
The assessee, an individual, declared income of Rs. 1,54,72,910/-. The case was selected for limited scrutiny, and the Assessing Officer noted interest income and claimed deductions under Section 57(iii). The Assessing Officer disallowed the interest expenditure of Rs. 1,03,18,929/-.
Held
The Tribunal found that the assessee had established a nexus between the borrowed amount and the lent amount on which interest was paid and earned. The Tribunal also noted that in a subsequent assessment year, a similar claim for deduction under Section 57 was allowed. Therefore, the disallowance by the lower authorities was not justified.
Key Issues
Whether the interest expenditure claimed as a deduction under Section 57 of the Income Tax Act is allowable when there is a direct nexus between the borrowed funds and the investment made to earn interest income.
Sections Cited
57, 143(2), 142(1), 36(1)(iii), 37(1), 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 27.09.2024 of the Ld. CIT(A) / NFAC, Delhi for assessment year 2017-18.
Facts of the case, in brief, are that the assessee is an individual and has filed his return of income on 26.03.2018 declaring total income of Rs.1,54,72,910/-. The case was selected for limited scrutiny under CASS. Accordingly, statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) were issued and served on the assessee, in response to which the AR of the assessee appeared before the Assessing Officer and filed the requisite details from time to time.
During the course of assessment proceedings the Assessing Officer noted that the assessee has showed interest income under the head ‘ Income from other sources’ of Rs.1,03,18,929/-. Further, the assessee has claimed deduction u/s 57(iii) of the Act of Rs.1,03,18,929/- against the income from ‘other sources’. According to the Assessing Officer, as per the provisions of section 57(iii) of the Act, 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, is allowed as deduction against income shown as ‘Income from other sources’. He, therefore, asked the assessee to furnish the details of deductions claimed u/s 57 along with supporting documents and proof of payments.
The assessee filed a chart giving the names of parties from whom such interest is received and paid, the details of which are as under:
Vinay Badera Details of interest received and interest paid Annexure – 3 Details of interest received S.No. Particulars Amount 1 Shubham Housing developers Pvt. Ltd. 1,384,190 2 Shubham Vipra Associates 7,649,327 3 Vinay K Bader (HUF) 1,00,168 4 Shubham Civil Projects Pvt. Ltd. 195,618 5 Interest from Society maintenance 61,506 6 VM Matera 25,120 Total 10,318,929 Details of interest paid S.No. Particulars Amount 1 Interest on Service Tax 9,572 2 Interest on TDS 111,609 3 Interest paid to Vikas Sale 15,467,993 4 Interest paid to RIMTL 79,562
5 Interest paid to Vardaan Associates 79,562 6 Interst paid to Vardaan Properties Pvt. Ltd. 429,041 7 Interest on Magma Fincorp Ltd. 84,712 8 Interest on Maintenance Deposit 188,969 Total 16,451,020
The assessee further submitted that the amounts received from Vikas Deep Sales were given to Shubham Vipra Associates and Shubham Housing Developers Pvt. Ltd. in earlier assessment year i.e. assessment year 2016-17. It was also submitted that in the earlier years such claim of interest payment was allowed u/s 57(iii) of the Act.
However, the Assessing Officer was not satisfied with the arguments of the assessee. Rejecting the various explanations given by the assessee and relying on various decisions, the Assessing Officer disallowed the payment of interest amounting to Rs.1,03,18,929/- and made addition of the same to the total income of the assessee.
In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer on the ground that there is no correlation between the interest earned and interest paid as required u/s 57 of the Act.
Aggrieved with such order of Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds: 1. The CIT(A) has erred on the facts and circumstances of the case and in law while confirming disallowance of interest expenses claimed u/s 57(iii) of the I.T. Act of Rs.1,02,32,303/- by holding that there was no co-relation between interest earned and interest paid as required u/s 57 of the I.T. Act, 1961 vide para 2.11 of the order u/s 250 of the 1.T. Act, 1961.
2. The CIT(A) has failed to appreciate the facts and circumstances of the case that the fund borrowed was advanced for the purpose of making and earning interest income.
3. The CIT(A) has not considered the fact that borrowed fund was taken in earlier years and routed through bank account frequently to different concerns/persons as per their needs whereas he has focused on direct entry wise nexus of borrowed fund and advanced funds which yielded interest income/expenses.
4. Alternatively, and without prejudice to Ground No. 1 to 3 above, appellant contends that appellant is eligible for deduction of interest expenses u/s 36(1)(iii)/37(1) of the I.T. Act, 1961 against business income.
5. The appellant craves leave to add, amend, alter or delete any one or more of the grounds of appeal
s as many be required in the nature and circumstances of the case.
6. The appellant prays leave to adduce such further evidence to substantiate her case as the Occasion may demand.
The Ld. Counsel for the assessee submitted that out of the amounts received from Vikas Deep Sales Pvt. Ltd. totaling Rs.6,50,00,000/-, an amount of Rs.6,00,00,000/- have been advanced to Shubham Vipra Associates and Shubham Housing Developers Pvt. Ltd. on various dates, the details of which are as under:
Sr. Receipt from Vikas Deep Sales Application of Funds Balance as on 31st March 17 No Private Limited Date Amount Date Amount Name of the party 1 10-04-2015 3,00,00,000.00 10-04-2015 3,00,00,000.00 Shubham Vipra 4,75,45,043.00 Associates 2 28-04-2015 3,00,00,000.00 30-04-2015 2,50,00,000.00 Shubham Housing 3,22,11,454.00 Developers Private Limited 3 13-05-2015 50,00,000.00 13-05-2015 50,00,000.00 Shubham Housing Developers Private Limited 6,50,00,000.00 6,00,00,000.00 7,97,56,497.00 Rate of interest 18% Interest on SVA and SHDPL advances 1,08,00,000.00 Claimed u/s 57 1,03,18,929.00
He submitted that the assessee was receiving interest and paying interest at the same rate. Referring to the assessment order for assessment year 2018-19, copy of which is placed at pages 221 to 225 of the paper book, he submitted that the Assessing Officer, after considering the details filed by the assessee, has allowed the interest expenditure u/s 57 of the Act. He accordingly submitted that the claim of interest expenditure u/s 57 of the Act should be allowed. He also filed a chart substantiating the nexus of the amount borrowed and the amount lent on which interest has been paid and interest earned. He accordingly submitted that since there is direct nexus of earning interest and paying interest and in subsequent assessment year such interest expenditure claimed as deduction u/s 57 has been allowed, the disallowance of interest u/s 57 by the Assessing Officer and upheld by the Ld. CIT(A) / NFAC is not justified.
The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC.
We have heard the rival arguments made by both the sides, perused the order of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case disallowed the claim of deduction u/s 57 of the Act on account of payment of interest out of interest income on the ground that the assessee could not justify that such expenditure was incurred wholly and exclusively for the purpose of earning such income from other sources. We find the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer on the ground that there is no direct nexus between the interest earned and the interest expended. It is the submission of the Ld. Counsel for the assessee that out of the loan amounts received from Vikas Deep Sales Pvt. Ltd. on 10.04.2015 amounting to Rs.3.00 crores, a loan of Rs.3 crores was given on interest to Shubham Vipra Associates on the very same day i.e. 10.04.2015. Similarly, out of Rs.3 crores received on 28.04.2015 from Vikas Deep Sales Pvt. Ltd., an amount of Rs.2.50 crores was given to Shubham Housing Developers Pvt. Ltd. on 30.04.2015. Similarly, out of the amount of Rs.50 lakhs received on 13.05.2015 from Vikas Deep Sales Pvt. Ltd. the same amount was given to Shubham Housing Developers Pvt. Ltd. on 13.05.2015 We find the assessee has earned interest income of Rs.1,08,00,000/- and has paid interest of Rs.1,03,18,929/- to Vikas Deep Sales Pvt. Ltd.
Further, a perusal of the assessment order for assessment year 2018-19 shows that this case was selected for limited scrutiny for three items, out of which second item was ‘income from other sources’. The Assessing Officer after considering the issue of large deduction claimed u/s 57 of the Act has allowed the claim of interest expenditure of Rs.97,27,186/- as deduction by observing as under: “B) Large Deduction claimed u/s.57 :- As per return of income for AY 2018-19, the assessee has claimed Rs.97,27,185/- as Deduction u/s 57 under the head Income from Other Sources in Schedule OS of ITR. In this regard, vide notice u/s 142(1) of the IT Act, 1961 dated 24.11.2020,
the assessee was asked to furnish the details with respect to the large deduction claimed u/s.57 in the ITR In response, the assessee furnished a reply letter dated 09.12.2020 along with Computation of Total Income, Copies of Form No. 16 (4 Nos.) and Copies of bank account statements. The assessee has not furnished any required details. Subsequently, vide Reminder letter dated 28.12 2020 and Notice u/s 142(1) of the IT Act, dated 03.02.2021, the assessee was asked to furnish the required details and also noticed that in the absence of required detail, why an amount of Rs.97,27,186/- being claimed as Deduction u/s.57 under the head Income from Other Sources should not be disallowed? In response, the assessee furnished the details and nature of income offered under the head income from other sources are as under- S.No Particulars of Interest Received Amount Rs. 1 Shubham Vipra Associates (Interest Received 85,58,107 @18%) 2 Shubham Civil Projects Pvt Ltd 20,24,200 3 Shubham Housing Developers Private Limited 12,50,466 4 Vinay Badera HUF 7,47,133 5 Total Interest Income 1,25,79,906 6 Less: Interest Received over and above 12% from 28,52,702 Shubham Vipra Associates disallowed as the same is being taxes in the Firm. 7 Net Interest Income 97,27,204 Further, the assessee furnished the details of deduction claimed u/s.57(1)(iii) as under.- S.No Particulars Amount Rs. 1 Shubham Taran Co-op Housing Society Ltd 1,51,000 2 Kasat Promoters LLP 1,21,552 3 Vikas Deep Sale - Interest paid at 18% 1,32,33,730 4 Vardaan Properties Private Ltd 3,09,021 5 Vardaan Lifestyle Limited 1,28,592 6 Vikaks Deep Sale - Interest paid at 12% 21,39,216 7 Total Interest Expenses 1,60,83,111 8 Less i) Interest Attributed to WIP (Business 13,73,360 Expenses) 9 ii) Interest Deducted against Interest on Capital 44,25,439 Associates) (Partnership Firm - Shubham Vipra 10 Interest claimed against House Property 5,24,319 11 Net interest Expenses available for Deduction 97,59,973 12 Interest Expenses Claimed as Deduction 97,27,186 In this connection, the assessee furnished the relevant ledger confirmation of the parties from whom the interest has been earned along with their ITR-V etc and verified. Further the assessee vide reply letter has substantiated that the interest expenses incurred by the assessee is being utilized for earning the interest income which is according to the principle laid down w/s. 57 which states that the expenditure must be laid out or expended wholly and exclusively and not necessarily for the purpose of making or earning the income irrespective of the fact that the assessee make the profit out of such expenses not. Further, that assessee stated that when the borrowed funds have been utilized for the purpose of making investment on which income earned is taxable, then the deductions for the interest on the borrowed fund is required to be allowed. The assessee's submission along with details furnished have been verified. After verifying, the assessee's claim for deduction u/s.57 is accepted.”
Since the assessee in the instant case has proved the nexus of amount borrowed on which interest has been paid and the amount lent on which interest has been earned and since the Assessing Officer in the subsequent year has allowed the claim of such deduction u/s 57 of the Act on account of same loans and advances after scrutiny, therefore, we are of the considered opinion that the Ld. CIT(A) / NFAC was not justified in sustaining the disallowance of interest expenditure claimed by the assessee u/s 57 of the Act. We accordingly set aside the order of the Ld. CIT(A) / NFAC and allow the grounds raised by the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 18th March, 2025.