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Facts
The assessee, engaged in borrowing and lending money, claimed a deduction for interest paid on unsecured loans and an LIC policy, reducing her 'income from other sources'. The Assessing Officer (AO) disallowed this deduction, stating a lack of direct nexus between borrowed funds and lending, and that interest-free funds were not substantiated. The CIT(A) upheld the AO's decision.
Held
The Tribunal held that since the assessee is regularly engaged in the business of borrowing and lending, establishing a one-to-one nexus between each loan taken and given is not required. The transactions were not disputed, and no effort was made by the AO to verify their genuineness. Therefore, the interest expenditure is deductible.
Key Issues
Whether interest expenditure incurred on borrowed funds is deductible when the assessee is engaged in a regular business of lending, even without a direct nexus for each transaction.
Sections Cited
57, 143(1), 143(2), 142(1), 270A
AI-generated summary — verify with the full judgment below
Order PER KRINWANT SAHAY, A.M: This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-5, Ludhiana dt. 02/12/2022 pertaining to Assessment Year 2017-18. 2. In the present appeal Assessee has raised the following grounds:
1. That under the facts, circumstances of the case and in law, the Ld. CIT(Appeals) erred in confirming the additions for Rs. 27,40,954/- made by the Assessing Officer for disallowance of interest expenses claimed by the assessee u/s 57(iii) of the Income-tax Act, 1961.
2. That under the facts and circumstances the order passed by the Commissioner of Income Tax (Appeals) confirming disallowance of interest expenditure for Rs. 27,40,954/- for earning interest income is bad in law.
3. That the appellate may be allowed to add, amend, alter or raise additional grounds of appeal till the disposal of the Appeal.
3. Briefly the facts of the case are that the assessee filed her income tax return for the Assessment Year 2017–18 on 31/11/2017, declaring a total income of Rs. 3,59,900/-. Her return included exempt profit share of Rs. 4,26,084 from a partnership firm i.e; Garg International, a long-term capital loss of Rs. 3,46,295/-, income from other sources amounting to Rs. 32,08,721/- including bank interest, FDR interest, and interest from unsecured loans, and agricultural income of Rs. 74,000. Against the interest income, she claimed a deduction of Rs. 27,40,954 under Section 57 of the Income Tax Act, 1961, comprising interest paid on unsecured loans of Rs. 26,76,681/- and interest on a loan against an LIC policy of Rs. 64,273/-, thereby reducing her taxable income under 'income from other sources' to Rs. 4,67,767. Initially processed under Section 143(1), her case was later selected for limited scrutiny through CASS, and several notices under Sections 143(2) and 142(1) were issued, to which she responded electronically, including submission of a Statement of Affairs showing interest-free funds of Rs. 153.94 lakhs. However, the Assessing Officer found her responses inadequate and unsupported by documentary evidence such as bank statements or ledgers, particularly in establishing a direct nexus between the interest expenditure and the interest income, as required under Section 57(iii). The AO observed that her claim of using accumulated interest-free funds to give unsecured loans lacked substantiation, and if loans were from personal funds, the interest expense would not be deductible. Further, the interest paid on the LIC loan was deemed unrelated to earning any taxable income. Reliance was place on the following judgments i.e; Smt. Virmati Ramakrishna v. CIT and Padmavati Jaikrishna v. Addl. CIT), the AO concluded that the conditions of Section 57 were not met, and disallowed the entire deduction, reassessed her income at Rs. 31,00,860, and initiated penalty proceedings under Section 270A for under-reporting due to misreporting, along with issuing demand and interest notices as per the Act. Thereafter AO assessed the total income at Rs. 31,00,860/-.
4. Against the order of the AO the assessee went in appeal before the Ld. CIT(A) who has since dismissed the appeal of the Assessee. 5. Against the order of the Ld. CIT(A), the assessee preferred an appeal before us.
During the hearing, Ld. AR submitted that the assessee is regularly involved in the business of borrowing and lending money for interest. In the financial year 2016–17, she earned Rs. 32,04,889/- as interest from the money she lend to others, and she paid Rs, 27,40,954/- as interest on the money she had borrowed. She showed the net interest income of Rs. 4,67,767/- in her tax return under the head "Income from Other Sources" and claimed a deduction for the interest paid under Section 57 of the Income Tax Act. However, the AO did not allow the interest expense, saying she failed to show a direct connection between the money she borrowed and the money she lend. This decision was also supported by the Ld.CIT(A). But this was not fair because the assessee clearly showed, using her financial statement, that she had borrowed Rs. 403.28 lakhs and given out Rs. 464.34 lakhs as loans. This shows a clear business pattern and that the borrowed money was used for lending. Also, the AO never questioned whether the transactions were real or whether the money was used elsewhere.
6.1 He further submitted that the CIT(A) referred to some earlier court cases to support the disallowance, but those cases were different from this one. In this case, the assessee clearly proved that the interest paid was linked to the income earned.
6.2 In fact, in a similar case i.e; Anil Kumar Goyal vs. ACIT in the Coordinate Bench held that a direct link between each loan taken and given is not needed if the person is regularly doing borrowing and lending business. So, the disallowance of the interest expense is not justified, and the interest paid should be allowed as a deduction under Section 57(iii).
Per contra, the Ld. DR relied on the order of the lower authorities.
We have heard the rival contentions of both the parties and perused the material available on the record. The assessee has demonstrated from the record that the activity of the assessee of taking interest bearing loan and making advances to other parties is continued for the last so many years. The assessee in this activity has earned net positive interest income. In our view in such a case, there is no need to establish one to one nexus between each of the transaction of loan taken and loan advanced by the assessee. There transactions of taking unsecured loans otherwise has not been disputed by the Department. Even the Assessing Officer has not made any effort to verify the genuineness of the transaction by summoning the concerned parties either who have advanced loan to assessee or the parties have taken loan from the assessee. There is no allegation that the assessee has used the interest bearing funds for some other purposes. Under the circumstances, in our view, the assessee is entitled to set off the interest expenditure against the interest income earned by the assessee and the net of the same has rightly been offered by the assessee for taxation. In view of above discussion, the addition made by the Assessing Officer is ordered to be deleted. 9. In the result, appeal filed by the Assessee is allowed.