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Facts
The assessee claimed a deduction of ₹ 50,09,820 as interest paid under Section 57 of the Income Tax Act, leading to a loss that was set off against salary income. However, the assessee failed to provide adequate details and corroborative evidence for these interest expenses. The Assessing Officer and the CIT(A) both disallowed the claim due to lack of proper documentation and establishing the dominant purpose of the expenditure.
Held
The Tribunal held that for a deduction under Section 57(iii) to be allowed, the expenditure must be laid out wholly and exclusively for the purpose of making or earning income, and not be of a capital or personal nature. The assessee failed to establish the commercial expediency and the dominant purpose of the loan was to meet the requirements of KJAPL, not to earn income.
Key Issues
Whether the disallowance of interest claimed as a deduction under Section 57(iii) was justified, and whether the CIT(A) erred in not admitting additional evidence.
Sections Cited
Section 57(iii) of the Income Tax Act, 1961, Rule 46A of Income-tax Rules, 1962
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Income Tax Appellate Tribunal, NAGPUR BENCH, NAGPUR
Before: SHRI V. DURGA RAO & SHRI K.M. ROY, ACCOUNTANT, MEMBER
Date of Hearing – 27/01/2025 Date of Order – 14/02/2025
O R D E R PER K.M. ROY, A.M.
Captioned appeal is by the assessee is emanating from the impugned order dated 05/01/2024, passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2014–15.
In its appeal, the assessee has raised following grounds:–
“1. Whether on the facts and circumstances of the the case, the CIT-(A) erred by sustaining the disallowance of interest under section 57(ul) made by tHPAOP 2. Whether on the facts and circumstances of the case, the CIT (A) erred by not admitting additional evidence under rule 46A
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3. The appellant craves leave to add or alter any other ground that may be taken at the time of hearing of this case.”
Facts in Brief:– During the course of assessment proceedings, from the computation of income, the Assessing Officer found that the assessee has claimed an amount of ` 16,95,192, under the head “Income From Other Sources” and also claimed deduction for an amount of ` 50,09,820, as interest paid under section 57 of the Income Tax Act, 1961 ("the Act"). The resulting loss of ` 33,14,628, was set off by the assessee against salary income to the extent of ` 33,14,628. During the course of assessment proceedings the Authorised Representative of the assessee was asked to furnish the details of interest from whom received and to whom interest paid and justify the claim under section 57 of the Act. , vide order sheet entry dated 13/07/2016, 25/07/2016, 11/08/2016 and 23/08/2016. No details were furnished by the assessee. Hence a show cause was issued on 07/09/2016 and the assessee was asked as to why the deduction under section 57 should not be disallowed. The assessee furnished a list of 39 unsecured loans persons with names only, no/details of amount of loans, interest furnished. The assessee filed confirmations of 20 persons. The assessee was asked to furnish the copy of Balance Sheet at 31/03/2013 and 31/03/2014 which was not furnished by the assessee. In the absence of Balance Sheet, the Assessing Officer could not ascertain the position of loans taken and loans given by the assessee.
When the matter was carried before the first appellate authority by the assessee, the learned CIT(A)’s observations vide Para–5.10 to 5.18 of the 3 Shri Nitin Madanlal Khandelwal ITA no.55/Nag./2024 impugned order are pertinent to reproduce below for better appreciation of facts and decision of the learned CIT(A):–
“5.10 Notwithstanding the above facts, even if for the sake of arguments, the claim of the appellant is admitted that there was a sufficient cause which prevented it from filing the evidence, it is seen that the additional evidences filed by the appellant under Rule 46 contain only list of loan taken and interest paid on the same along with the details of loans advanced to the Company in which he is director and firm was given. I find that it is not sufficient evidence as assessee failed to provide corroboratory evidences such as loan confirmations, bank statements showing identity, genuineness and creditworthiness of the loan creditor etc. Therefore, even the additional evidence itself is not sufficient evidence which would have been crucial for disposal of the appeal. In view of the above findings, the application for admittance of additional evidence under Rule 46A made by the appellant is not accepted and is rejected as they do not fall within the circumstances in which the appellant is allowed to file the additional evidences as per the Rule 46A(1) of Income-tax Rules, 1962 5.11 Coming to the merits of the addition/disallowance made by the AO, the AO during the course of assessment proceedings found that the appellant has claimed income form other sources Of Rs. 16,95,192 and claimed deduction u/s 57 of the Act of interest paid of Rs 50,09,820. The resulting loss of Rs 33,14,628 was set off by the appellant against salary income to the extent of Rs 33,14,628. Sufficient opportunity was given by the AO to the appellant during the course of assessment proceedings to furnish details of interest form when received and to whom paid and to justify the claim u/s 57 of the Act. In response the appellant furnished a list of 39 unsecured loans persons with name only and no details of amounts of loans, interest were furnished. The AO also found that the appellant furnished confirmations of only 20 persons. The AO asked the appellant to furnish copy of balance sheet as 31.03.2013 and 31.03.2014 which was not furnished by the appellant. The appellant submitted before the AO that it has paid interest on loans from friends and relatives and also received interest from the same amount given on interest. The AO during the course of assessment proceedings found that the appellant has not been able to establish that the borrowal was for business purposes. The appellant submitted during the appeal proceedings that during the year under consideration, he received new loans to the tune of Rs.3,59,35,000 and advanced the same to Khandelwal Jewellers Akola Private Limited ('KJAPL'). 5.12 Section 57 of the Act as it stood during the relevant year reads as under:- "57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely:- (i) in the case of dividends, [other than dividends referred to in section 115-0 J[or interest on securities], any reasonable sum paid by way of commission or 4 Shri Nitin Madanlal Khandelwal ITA no.55/Nag./2024 remuneration to a banker or any other person for the purpose of realising such dividend [or interest) on behalf of the assessee; [(ia) in the case of income of the nature referred to in sub-clause (x) of clause (24) of section 2 which is chargeable to income-tax under the head "Income from other sources", deductions, so far as may be, in accordance with the provisions of clause (va) of sub-section (1) of section 36;] (ii) in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30, section 31 and [sub-sections (1) [***] and (2)] of section 32 and subject to the provisions of [ section 38]; [(iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or [fifteen] thousand rupees, whichever is less. Explanation. For the purposes of this clause, "family pension" means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death ;] (iii) 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; [(iv) in the case of income of the nature referred to in clause (viii) of sub- şection (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section.] 5.13 The appellant contented that a bare perusal of the statute, specifically section 57(iii), stipulates two conditions for claiming exemption under section 57(iii), i.e that Expenditure should not be capital in nature; and Expenditure must be laid out wholly and solely for the purpose of earning such income. The appellant submitted that since, the expense claimed by the Appellant is for the interest paid on the loans taken, the question of it being a capital expenditure doesn't arise. As far as second condition is considered, the appellant submitted that he has taken loans to invest in the private limited company, for earning income in form of interest, dividend or capital gain. The appellant further submitted that the fact that no income from private limited company was earned during the year, cannot be an impediment to claim of an expenses, and relied on the judgement of CIT vs Rajendra Prasad Moody 1979 AIR 373, 1979 SCR (1)1047, wherein it has held by the Hon'ble Supreme court that the essential condition for claim under section 57(iii) is that the expenditure should have been made wholly and exclusively for earning such income, whether, any income has been earned in the year under consideration is of no consequence from the perspective of allowability of the claim under section 57(iii). I find that the substantial question of law in case of CIT vs Rajendra Prasad Moody 1979 AIR 373, 1979 SCR (1)1047 was "whether on the facts, and in the circumstances of the case, interest on money borrowed for the investment in shares which had not yielded any dividend is admissible under section 57(iii)?" The above case is not applicable in the case of the appellant as the fact differs in this case as the appellant had invested in its 5 Shri Nitin Madanlal Khandelwal ITA no.55/Nag./2024 own Private Limited Company and had not earned any income from the profitable company on loans advanced but expenses were claimed in individual Return. 5.14 I find that the expenditure as envisaged by section 57(iii) of the Act should not be in the nature of capital or personal expenditure and it should have been incurred wholly and exclusively for the purpose of making or earning the income which is chargeable under the head "income from other sources. The Hon'ble Gujarat High Court in Padmavati Jaykrishna vs. CIT (1981) 131 ITR 653 has held that in order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined. Also the Gujarat High Court in the case of Sarabhai Sons (P) Ltd. vs. CIT (1993) 113 Taxation 407, 201 ITR 464 has held that if the dominate purpose for which the expenditure was incurred not to be earn the income, the expenditure incurred in that behalf would fall outside the purview of section 57(iii) of the Act. Where the dominant purpose of the assessee in taking overdrafts was not to earn income but to meet the personal liability, interest payment on overdrafts was held to be not allowable deduction under section 57(iii) of the Act (H. H. Maharaja Martand Singh Ju Deo Vs. CIT (1989) Taxation 92(3)-199, 174 ITR 515 (MP): Padmavati Jai Krishna Vs. Addl. CIT (1987) Taxation 86(2)-1: 166 ITR 176 (SC)). 5.15 In the case of the appellant, I find that the appellant has not been able to establish the commercial expediency of the transaction entered into by the appellant. The appellant has admitted that as the statutes did not allow KJAPL to borrow from open market, the appellant had no other choice but to take loan in his personal capacity to advance loan to the company, which, in turn was used by KJAPL for business purposes. Therefore, it is clear from this admission of the appellant that the dominant purpose for which the expenditure was incurred was not to earn the income, but as the statutes did not allow KJAPL to borrow from open market, the appellant had no other choice but to take loan in his personal capacity to advance loan to the company. Therefore, the expenditure incurred in that behalf would fall outside the purview of section 57(iii) of the Act. It is clear that the dominant purpose of the appellant in taking unsecured loans and advancing the same to KJAPL was not to earn income itself but to meet the requirements of KJAPL. 5.16 The Appellant also submitted that he has reported interest income under the head "Income from other sources" and therefore the basic premise of the AO that the advance should be for the business purpose is unfounded as the Appellant has claimed interest expenditure under section 57(iii), therefore there is no requirement of establishing nexus with the business. I find that Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if expenditure has resulted in actual income but the purpose of incurring expenditure needs to be to earn income, then the expenditure would be allowed as a deduction under Section 57(iii) of the Act. This purpose has not been established by the appellant in the instant case as the dominant purpose for which the expenditure was incurred was not to earn the income, but as the statutes did not allow KJAPL to borrow from open market, the appellant took loan in his personal capacity to advance loan to the company. Therefore, if appellant earned any interest from it, it was only secondary motive and not the dominant purpose or primary motive.
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5.17 Further, the appellant has earned income from saving Bank interest and Bond, which has no nexus with the interest claimed u/s 57 of the Act. The appellant had not earned any interest from the Khandelwal Jewellers (Akola) Pvt. Ltd or Khandelwal Jeweller the appellant submitted that the he has taken loans to invest in the private limited company, for earning income in from of interest, dividend or capital gain. But this is contrary to his claims that as the statutes did not allow KJAPL to borrow from open market, the appellant had no other choice but to take loan in his personal capacity to advance loan to the company. The case of S. A. Builders Ltd. vs CIT Appeal (civil) 5811 of 2006, is not applicable in the case of the appellant as the question involved in this case is only about the allowability of the interest on borrowed funds and hence the decision dealt only with that section 37 of the Act and does not involve the section 57(iii) of the Act. 5.18 In view of the above facts and submission, I find that the appellant has not been able to establish the commercial expediency of the transaction entered into by the appellant as it is clear that the dominant purpose for which the expenditure was incurred was not to earn the income, but as the statutes did not allow KJAPL to borrow from open market, the appellant took loan in his personal capacity to advance loan to the company. I find that it is not laid out or expended wholly and exclusively for the purpose of making or earning such income. Therefore, the expenditure incurred in that behalf would fall outside the purview of section 57(iii) of the Act. It was not to earn income itself but to meet the requirements of KJAPL. Thus the disallowance of ` 50,09,820 made by the A.O. sustained and the appeal on Ground no.1 and 2 are thus dismissed.”
The learned Authorised Representative for the assessee could not produce any single document to buttress his claim. He only produced details of unsecured loans which are culled out from Page–12 & 13 of the impugned order passed by the learned CIT(A) are tabulated below:–
“15. Without prejudice to above, the assessee had furnished the loan confirmation from various parties and it is found that the following loan creditor does not have PAN:
Name Amount Pragya Agrawal ` 49,486 Radheshyam Shao (HUF) ` 60,833 Shri Balaji Transport Services ` 46,850 Sindhu Patil ` 38,323 Ramanand Ramprasad ` 1,00,317 Total: ` 2,95,809
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In some cases, loan confirmations have difference in interest paid then claimed in additional evidences.
Interest Interest Name paid as per Difference claimed confirmation Nitin Khandelwal ` 5,84,445 ` 6,77,367 ` 92,922
In come cases, loan confirmation are not submitted even during Remand proceedings:
Name PAN Amount Haldaur Leasing & Finance Pvt. Ltd. AABCH5712L ` 4,42,750 Harish Agrawal ADHPA2872L ` 36,000 Lokesh Bhala AIHPD7187L ` 88,000 Lokesh Bhala AAWPC6094L ` 30,417 Shri Sitadevi Poddar AGQPP0542A ` 1,20,000 Subhash Kelkar ADEPK3062D ` 30,335 Total: ` 7,47,502
Therefore, no genuineness of interest paid are available in the case of assessee for ` 11,36,233 (295809+92922+747502) due to non–submissions of evidences produced.”
No documentary evidences were furnished before us also to support the contentions. We are not at all impressed by the above submissions particularly in view of the fact that the assessee has miserably failed to come out with clear hands explaining all the facts before the authorities below. Moreover, the assessee has not produced any bank statement to establish fund trial. In view of these discussions, we do not hesitate to uphold the impugned order passed by the learned CIT(A) as there is no merit in the grounds raised by the assessee which are out rightly dismissed by upholding the impugned order passed by the learned CIT(A).
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In the result, appeal filed by the assessee stands dismissed. Order pronounced in the open Court on 14/02/2025