SANDIP VALLABHDAS PARIKH,AHMEDABAD vs. THE DY. COMMISSIONER OF INCOME TAX, AHMEDABAD

Aggrieved thereby, the assessee has preferred the present appeal before us raising following grounds of appeal: 1. That on facts, and in law, the learned NAC has grievously erred in confirming the disallowance of Rs. 39,60,528/- made u/s 57 (iii) of the Act in respect of claim of interest expenses. Asst. Year : 2017-18

That on facts, and in law, the learned NAC and AO has grievously erred in not at all considering the submissions and evidences filed, and in dismissing the appeal.

The appellant craves liberty to add, alter, amend any ground of appeal.

During the course of hearing before us, the learned Authorized Representative (AR) reiterated the facts as stated in the statement of facts and drew our attention to the detailed submissions filed before the Assessing Officer, including the replies dated 22.09.2019, 23.10.2019, and 15.11.2019, placed in the paper book. It was submitted that the assessee had duly furnished complete details of interest income earned, interest expenditure incurred, ledger accounts of the parties, merged balance sheet, computation of income, and bank statements during the course of assessment proceedings. The learned AR contended that the Assessing Officer had not questioned the authenticity or genuineness of the interest payments made. The Assessing Officer had only doubted the existence of a nexus between borrowed funds and the loans and advances on which interest income was earned. The AR submitted that the nexus had been clearly explained and substantiated both before the Assessing Officer and the CIT(A), but the authorities failed to properly appreciate the evidences placed on record.

1. The learned AR further pointed out that the assessee had borrowed funds from various parties such as White Valley Pvt. Ltd., Tulsi Industries, and Tulsi Dyechem Pvt. Ltd., and in turn advanced the amounts to earn interest income. Since the assessee could not commence business activities during the relevant assessment year, the borrowed funds were utilized to give loans and earn interest, thereby establishing the nexus between the interest-bearing borrowings and the interest-yielding advances. In support of Sandip Vallabhdas Parikh vs. CIT Asst. Year : 2017-18

2. It was submitted that the above borrowings and advances were routed through banking channels and duly supported by bank statements placed on record. Thus, there was a clear one-to-one nexus established between borrowed funds and the loans advanced, which ultimately generated taxable interest income offered under the head "Income from Other Sources."

3. The AR also emphasized that any portion of the interest expenditure that pertained to amounts diverted for personal purposes, or capital account, had not been claimed as deduction, but was transferred to the capital account Asst. Year : 2017-18

The learned Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities and contended that the assessee had failed to establish a clear nexus in respect of the interest-bearing borrowings and the corresponding advances before the lower authorities.

1. The DR further raised a question regarding the true purpose for which the borrowed funds were obtained and the amounts were subsequently advanced to other parties.

We have carefully considered the rival submissions made by both sides and have perused the orders of the authorities below. We have also gone through the material placed on record, including the paper book containing the assessee’s submissions before the Assessing Officer and the Commissioner of Income Tax (Appeals), bank statements, ledger accounts, statement showing nexus between borrowings and advances.

1. The sole dispute in the present appeal revolves around whether the assessee is entitled to deduction of interest expenditure amounting to Rs.39,60,528/- under section 57(iii) of the Income Tax Act, 1961 against the interest income earned under the head "Income from Other Sources."

2. It is not in dispute that the assessee had borrowed funds on which interest was paid. It is also not in dispute that the assessee has earned interest income by advancing certain funds during the relevant previous year. The Sandip Vallabhdas Parikh vs. CIT Asst. Year : 2017-18

3. Under section 57(iii) of the Act, for claiming deduction, it is not necessary that the expenditure must result in earning income. The only requirement is that the expenditure should have been incurred "wholly and exclusively" for the purpose of earning income. What is necessary is the purpose of the expenditure — namely, for making or earning income. Asst. Year : 2017-18

5. During the course of hearing, the learned Departmental Representative further raised a question regarding the true purpose for which the borrowed funds were obtained, and the subsequent advances made to third parties. In this regard, we observe that the assessee has consistently contended that the funds were initially borrowed with an intention to commence business activity; however, since business could not be commenced, the funds were utilized for advancing loans to earn interest income. The assessee has placed on record a detailed statement showing the flow of funds, along with supporting bank statements and ledger accounts, evidencing that the borrowings were immediately or shortly thereafter advanced to third parties on which interest income was earned and offered to tax. We find that the explanation offered by the assessee is duly supported by documentary evidence and has not been controverted by bringing any material on record to demonstrate diversion of funds for non-business purposes or for purposes other than earning taxable interest income. In the absence of any adverse material, the mere raising of a question regarding the purpose of borrowing and lending, without disproving the evidence furnished, cannot be a ground to deny the claim of deduction under section 57(iii) of the Act.

6. In the present case, the nexus, at least indirect if not direct, between the interest-bearing borrowings and the interest-earning advances is sufficiently established by the assessee by furnishing cogent documentary evidence. The Assessing Officer and the CIT(A) have disregarded the evidence placed on record without pointing out any specific defect therein. Disallowance cannot be sustained on mere conjecture or suspicion, without any tangible adverse material. Asst. Year : 2017-18

7. It is further noted that the learned AR has brought to our attention that in the subsequent Assessment Year 2018–19, the assessee had claimed deduction of similar interest expenditure against interest income earned on loans and advances, and the same was allowed by the CIT(A) vide order dated 11.03.2025. The learned AR submitted that the facts and circumstances in the subsequent year are identical to the present year, and therefore, in the absence of any material change in facts or law, the principle of consistency ought to be followed. The copy of the said order was placed on records. In this regard, it is well settled that where there is no change in facts or law, and a particular view has been taken in the assessee’s own case for a different year, consistency demands that the same view should ordinarily be followed, unless there is a distinguishing feature brought on record.

8. Having regard to the totality of the facts and circumstances of the case, we are of the considered opinion that the assessee is entitled to claim deduction of Rs.39,60,528/- under section 57(iii) of the Act, and the disallowance made by the Assessing Officer and confirmed by the CIT(A) is not sustainable in law. Accordingly, the disallowance of Rs. 39,60,528/- is directed to be deleted.

In the result, the appeal filed by the assessee is allowed.

अपीलाथ% / The Appellant 2. #&थ% / The Respondent. 3. संबंिधत आयकर आयु' / Concerned CIT 4. आयकर आयु' ) अपील ( / The CIT(A)- 5. िवभागीय #ितिनिध , आयकर अपीलीय अिधकरण , अहमदाबाद /DR,ITAT, Ahmedabad. 6. गाड फाईल / Guard file.