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Facts
The appellant, an individual engaged in wholesale and retail trade, had interest paid on loans borrowed from friends and relatives disallowed by the AO, leading to a substantial addition to his income. The AO and CIT(A) held that the appellant failed to prove the genuineness of the loans, details, nexus with investment, and the identity, genuineness, and creditworthiness of the lenders, making the interest disallowable under Section 57(iii) of the Act.
Held
The Tribunal found that since the AO did not make any addition under Section 68, the genuineness of the loans was not in question. Relying on the Supreme Court's decision in Rajendra Prasad Mody, the Tribunal held that interest expenditure incurred on moneys borrowed for making investments is an admissible deduction under Section 57(iii) of the Act, even if the investment has not yielded any interest. Thus, the reasoning of the lower authorities was unsustainable.
Key Issues
Whether interest paid on loans borrowed for investment purposes is an allowable deduction under Section 57(iii) of the Income Tax Act even if the investment yields no income, and whether the assessee had discharged the onus of proving the genuineness and creditworthiness of the lenders.
Sections Cited
143(3), 57(iii), 68
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI SOUNDARARAJAN K., JM
O R D E R These appeals filed by the assessee are directed against the order of the National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 27.12.2023 for Assessment Years (AY) 2016-17 to 2018-19.
Since identical issues are involved in these appeals, they are heard together and disposed of by this common order. For the sake of
Brief facts of the case are that the appellant is an individual engaged in the business of wholesale and retail trading of paint, steel,, cement, sanitary and hardware items. The return of income for AY 2016- 17 was filed on 17.10.2016 declaring total income of Rs. 37,97,390/-. Against the said return of income, the assessment was completed by the ACIT, Thiruvalla (hereinafter called "the AO") vide order dated 21.12.2018 passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) at a total income of Rs. 5,42,39,544/-. While doing so, the AO made addition of Rs.4,88,78,154/- by disallowing the interest paid on loan borrowed on the ground that the appellant had failed to discharge the onus of proving genuineness and provide any details of loan and also failed to establish nexus between he loan amount borrowed and the investment made. Accordingly he made disallowance of interest u/s. 57(iii) of the Act.
Being aggrieved, an appeal was filed before the CIT(A) contending that the interest paid on loan borrowed from friends and relatives is allowable as the loans were utilised for the purpose of making investments made for earning interest income. However, the CIT(A) dismissed the appeal based on the findings of the AO in the remand report that the appellant failed to prove identity, genuineness and creditworthiness of the lenders.
Being aggrieved, the appellant is in appeal before the Tribunal in the present appeal.
135 & 136/Coch/2024 Jacob Thomas 6. The learned counsel for the assessee stated that during the course of proceedings before he CIT(A) the appellant produced conformation letters from lenders, thus discharged the onus lying upon him by proving identify, genuineness and creditworthiness of the transactions. He submitted that no disallowance of interest can be made merely because the investment has not yielded interest, placing reliance on the decision of the Hon'ble Supreme Court in the case of Rajendra Prasad Mody 115 ITR 519.
On the other hand, the learned Sr. DR vehemently opposed allowance of interest paid on loans borrowed from friends and relatives.
On perusal of the assessment order it is clear that the AO denied deduction of interest paid on loans borrowed solely on the ground that the appellant failed to prove the genuineness of the loans as well as the investment had not yielded interest income. However, the AO had chosen not to make addition u/s. 68 of the Act. Therefore the question of genuineness of the loan does not arise. It appears that the AO disallowed the claim solely on the ground that the appellant claimed deduction of higher interest as compared to the income earned. Even the learned CIT(A), adopted the same reasoning while upholding the order of the AO. The reasoning of the lower authorities cannot be sustained in the eyes of law, as it is well settled position of law that interest expenditure incurred on moneys borrowed for the purpose of making investments, which had not yielded any interest, is still an admissible deduction u/s. 57(iii) of the Act in view of the above decision of the Hon'ble Supreme Court in the case Rajendra Prasad Moody (supra)
Order pronounced in the open court on 14th May, 2025.