LAXMICHAND DEDHIA,MUMBAI vs. ITO 27 (2)(3), MUMBAI

The first issue to be decided is with regard to disallowance of interest made u/s.57(iii) of the Act in the sum of Rs.2,79,594/-. The Shri Laxmichand Dedhia interconnected issue involved thereon is disallowance of brokerage of Rs.1,00,000/- on borrowed loan.

We have heard rival submissions and perused the materials available on record. We find that assessee is an individual deriving business income and income from other sources. The assessee has shown interest income of Rs.22,47,090/- against which interest and brokerage expenditure of Rs.18,55,020/- was claimed as deduction. We find that assessee had made borrowings from parties @15% per annum and had invested the same in the partnership firm where assessee is a partner, wherein he earned interest @12% per annum. This interest income @12% was offered under the head ‘income from other sources’ by the assessee in the return of income and taxed as such by the ld. AO. The interest expenditure on borrowings @15% was claimed as deduction by the assessee u/s.57(iii) of the Act. We find that the ld. AO had also granted deduction towards interest on borrowings u/s.57(iii) of the Act under the head ‘income from other sources for a reduced amount. We find that the ld. AO sought to disallow the difference in interest rates @3% (15%-12%) u/s.57(iii) under the head ‘income from other sources’ while completing the assessment. We find that there is absolutely no dispute in the facts and circumstances of the case that borrowed monies were invested by the assessee in the partnership firm. The borrowings made by the assessee were accepted as genuine by the lower authorities. We find that the ld. AR before us had pleaded that the average rate of interest paid is only 13.4% and not 15% as observed by the ld. AO. This is in view of the fact, certain borrowings were made by the assessee at reduced rate of interest. We find that once the borrowings were accepted as genuine and one to one nexus is found to have been proved that the said borrowings were indeed utilised for investment in a partnership firm wherein assessee was a partner, there cannot be any question of Shri Laxmichand Dedhia disallowance of interest on the borrowings. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody reported in 115 ITR 519 wherein it was held as under:- “What section 57 (iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that, is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure.”

3.1. Accordingly, we direct the ld. AO to delete the disallowance of interest in the sum of Rs.2,79,594/- under the head ‘income from other sources’.

The last issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in upholding the addition made on account of annual value of house property in respect of property situated in a small village of Kutch district @20,000/- in the facts and circumstances of the case.

In the result, appeal of the assessee is partly allowed.