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Facts
The assessee claimed interest expenses on a business loan. The Assessing Officer (AO) disallowed this claim, and the CIT(A) confirmed the addition, stating that the assessee failed to establish a direct nexus between the loan obtained and the income generated. The assessee argued that the loan was used to advance funds to another entity from which interest income was received.
Held
The Tribunal held that Section 57(iii) of the Income Tax Act allows deduction for expenditure incurred wholly and exclusively for the purpose of making or earning income from other sources. The Bench found that the assessee had provided sufficient evidence, including bank statements and ledger accounts, demonstrating that the loan was utilized for advancing to M/s Kandoi Metal Powder, from whom interest income was earned, thus establishing a direct nexus.
Key Issues
Whether the interest paid on a business loan, which was advanced to another party from whom interest income was derived, is deductible as an expense for earning income from other sources.
Sections Cited
57(iii), 37(1), 24
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Income Tax Appellate Tribunal, JAIPUR BENCHES,”SMC’’ JAIPUR
Before: Hon’ble SHRI SANDEEP GOSAINvk;dj vihy la-@ITA No. 575/JP/2024
ORDER PER: SANDEEP GOSAIN, JM This appeal filed by the assessee is directed against order of the ld. CIT(A), Jaipur-4 dated 22-04-2024 for the assessment year 2017-18 raising therein following ground of appeal. ‘’Under the facts and circumstances of the case the Ld CIT(A) has erred in confirming the addition of Rs. 1,92,939/- by disallowing of interest expenses which has been claimed against income from other sources.’’
2. RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR 2.1 Apropos Solitary Ground of the assessee, the facts as emerges from the order of the ld. CIT(A) who has dismissed the appeal of the assessee by observing as under:- Decision:- The appellant has claimed interest expenses on business loan against the income from other sources. In this case, no direct nexus has been proved by the appellant to establish that the interest expenditure was incurred wholly and exclusively for earning the interest income in terms of provision of section 57(iii) of the Act. The appellant has cited the judgements in the submissions in support of his ground of appeal and as per the ratio of the judgements the nexus is required to be proved by the assessee. In the submissions the appellant has claimed that there is nexus between the business loan obtained from ICICI Bank and its deployment in earning income from other sources. However the appellant has not established the nexus with the relevant material and the cash flow statement regarding the dates of the receipt of the loan from the bank and movement of funds and proving the nexus despite of the conclusion in the assessment order that the appellant has not been able to show the nexus. It is relevant to note that in the assessment order the learned AO has allowed deduction of interest to parties of Rs. 52,15,958 and has only disallowed Rs. 1,92,939 which is on the business loan obtained from the bank. It is held by the Hon'ble ITAT in the case of RRPR Holding (P.) Ltd. v. Deputy Commissioner of Income-tax [2023] 152 taxmann.com 537 (Delhi Trib.)/[2023] 201 ITD 781 (Delhi-Trib.)[22-06-2023] as under:- "
Before the Tribunal, the Id. counsel has merely reiterated its contentions placed before the lower authorities without showing any nexus between the interest earned and 3 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR corresponding interest expenditure as observed. The Revenue on the other hand has clearly recorded a finding of fact that the interest expenditure has not given rise to the corresponding interest, income. The interest income has arisen independently out of fixed deposits fixed with bank, the source of which in turn is sale of investments. The interest expenditure on the other hand has been incurred on borrowers utilized for investment in acquisition of shares of NDTV Ltd. Thus, apparently the assessee has failed to discharge the onus which lays upon it to show that incurring of expenditure has resulted in corresponding income taxable under the head income from other sources'. In the absence of any live nexus between the expenditure and the corresponding income, the Revenue Authorities have rightly disallowed the claim of interest expenses having regard to the narrower scope of deductions eligible under section 57(i) of the Act. We thus decline to interfere with the action of the Assessing Officer and the First Appellate Authority." The learned AO in the assessment order has done the analysis of the funds and give a categorical finding that the appellant has not been able to show the nexus with respect to the utilisation of the business loan obtained from the bank wholly and exclusively for the purposes of earning of interest income from other sources. Further the business loan by nature and by the undertakings in the loan documents, can be used only for the purposes of business to the appeal proceedings also the appellant has not been able to establish the nexus in his submissions. Accordingly this ground of appeal of the appellant is hereby dismissed.’’ 2.2 During the course of hearing, the ld.AR of the assessee submitted that the assessee is an individual who has derived income from salary and other sources being interest from bank and various parties. The assessee furnished his return of 4 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR income on 01.08.2017 declaring a total income of Rs 16,92,710/-. The AO has completed the assessee u/s 143(3) of the I.T. Act, 1961 on 17-12-2019, determining total income of Rs. 18,85,649/- by making the addition of Rs. 1,92,939/- and disallowing interest payment claimed by the assessee against interest income under the head income from other sources. Aggrieved with the order of the AO, the assessee preferred appeal before the Ld.CIT(A) who has confirmed the addition made by the AO without considering the submission of the assessee. 2.3 Now aggrieved with the order of the Ld. CIT(A), the assessee preferred appeal before the Bench praying that the addition made by the AO amounting to Rs.1,92,939/- and confirmed by the ld. CIT(A) needs to be deleted as the AO has also not allowed the claim of interest payment out of interest received by the assessee. During the course of assessment proceedings as well as penalty proceedings the assessee had submitted that the interest was paid to the parties from whom the assessee had received loans the same loans was given to other persons from where the assessee has received interest income. The assessee has obtained business loan from ICICI against mortgage/pledge of his house. The loans so received by the assessee from ICICI bank were utilized for advancing the same to M/s Kandoi Metal Powder from where the assessee has received interest 5 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR income. The interest received by the assessee has shown under the head 'income from other sources'. Hence the assessee has also claimed interest payment to ICICI Bank of Rs. 1,92,939/- under the head 'income from other sources. The interest payment is allowable u/s 57(iii) of the Income Tax Act, 1961. There is direct nexus between interest payment and interest received. However, the AO has not considered the submission of the assessee and disallowed the interest payment of Rs. 1,92,939/-. The action of the AO is unjustified because the AO has treated the same loan as housing loan and disallowed the claim of the assessee. He further submitted that if it is a housing loan then otherwise it was allowable as interest payment for self occupied house u/s 24 of the Income Tax Act, 1961. The assessee has not claimed any interest payment as deduction u/s 24 of the Income Tax Act, 1961. Therefore the disallowance made by the AO was totally unjustified and illegal and action of the ld. CIT(A) in confirming the disallowance made by the AO is also unjustified which should be allowed. 2.4 On the other hand, the ld. DR refuted the submissions of the ld. AR of the assessee and relied upon the orders of the lower authorities. 2.5 The Bench has heard both the parties and perused the materials available on record. Brief facts of the case are that the AO has also not allowed the claim of interest payment out of interest received by the assessee. During the course of 6 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR assessment proceedings as well as penalty proceedings the assessee has submitted that the interest was paid to the parties from whom the assessee has received loans the same loans was given to other persons from where the assessee has received interest income. The assessee has obtained business loan from ICICI against mortgage/pledge of his house. The loans so received by the assessee from ICICI bank were utilized for advancing the same to M/s Kandoi Metal Powder from where the assessee has received interest income. The interest received by the assessee has shown under the head 'income from other sources'. Hence the assessee has also claimed interest payment to ICICI Bank of Rs. 1,92,939/- under the head 'income from other sources. The interest payment is allowable u/s 57(iii) of the Income Tax Act, 1961. There is direct nexus between interest payment and interest received. But the Learned Assessing Officer has not considered the submission of the assessee and disallowed the interest payment of Rs. 1,92,939/-. The action of the AO is unjustified because the AO has treated the same loan as housing loan and disallowed the claim of the assessee. He submitted that if it is a housing loan then otherwise it was allowable as interest payment for self occupied house u/s 24 of the Income Tax Act, 1961. The assessee has not claimed any interest payment as deduction u/s 24 of the Income Tax Act, 1961. Therefore the disallowance made 7 ITA NO. 575/JP/2024 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR by the learned AO was totally unjustified and illegal. The Bench refers the Section 57 as under:- Deductions from 'Income from Other Sources' [Section 57] – The income chargeable to tax under this head 'Income from Other Sources' is computed after making the following deductions: (i) In the case of dividend income (and interest on securities: any reasonable sum paid by way of remuneration or commission for the purpose of realising dividend or interest. (ii) In the case of income in the nature of family pension: Rs. 15,000 or 33 1/3 % (33.33%) of such income, whichever is lower. (iii) In the case of income from machinery, plant or furniture let on hire: repairs to building [section 30(a)(ii)]; current repairs to machinery, plant or furniture and insurance premium [section 31]; depreciation on building, machinery, plant or furniture [section 32]; and unabsorbed depreciation [section 32(2)]. (iv) Any other expenditure (not being a capital expenditure) expended wholly and exclusively for the purpose of earning of such income.
8 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR The case of the assessee is covered in point no. (iv). Hence the addition made by the AO deserves to be deleted. Clauses (i), (ia), (ii) & (iia) of section 57 specifically mention to deductions available while computing the income chargeable under the head ‘Income from other sources’. Clause (iii) to section 57 makes admissible the deduction of 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 (income chargeable under the head “income from other sources“). Section 57(iii) of the Act is in line with the section 37(1) of the Act which in general (subject to its Explanation) makes available deduction of any expenditure (not being expenditure of the nature described in sections 30 to 36 of the Act and not being in the nature of capital expenditure or personal expenses of the assessee) laid down or expended wholly and exclusively for the purposes of the business or profession while computing the income chargeable under the head “Profit and gains of business or profession. It may be pertinent to mention the distinction in the language used by the legislature in section 37(1) of the Act and 57(iii) of the Act. It may be noted that Section 37 provides for deduction of expenditure incurred wholly and exclusively “for the purpose of business” whereas section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively “for the purpose of making or earning such income”. “Such income”
9 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR refers to “income from other sources”. The expression “for the purpose of business” is narrower that the expression “for the purpose of making or earning such income”. In order that an expenditure may be admissible under section 57(iii) it is necessary that the primary motive of incurring it is directly to tern income falling under the head “income from other sources”. That is not so under section 37 which allows deduction of expenditure; incurred wholly and exclusively” for the purpose of the business”. Under section 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head “income from other sources” CIT vs. Smt. Amirtaben R. Shah (1999) 152 Taxation 721 (Bom.). In CIT vs. Kasturbhai Lalbhai (1968) 70 ITR 267 (Guj.), the assessee were director of A & Co. Ltd., of which K. N. Co. Ltd. was the managing agent. Due to certain mismanagement and change in the directorate of K. N. Co. Ltd., there were difference between the assessees and the other directors of A & Co. Ltd. . The assessees therefore sent out two circulars to the shareholders pointing out the mismanagement. They also collected proxies for a meeting of A & Co. Ltd. requisitioned in the meantime. Before the said meeting could be held, the differences were settled and ultimately the first assessee was elected chairman of the board of directors of A & Co. Ltd. The assessees jointly spent about Rs. 33,299 for sending out the circulars and collecting the proxies and claimed to deduct this 10 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR amount in their respective assessment both under section 10(2)(xv) and under section 12(2) of I. T. Act, 1922 (which corresponds to section 37(1) & 57 of I. T. Act, 1961, respectively). The departmental authorities negatived this claim, but the Tribunal allowed the expenditure as a permissible deduction under section 12(2). The Tribunal, however, rejected the contention of allowability under section 10(2)(xv). On a reference to the Gujarat High Court, it held as follows: (i) as the assessees had incurred the expenditure in issuing the circulars on the ground of commercial expediency in order to indirectly facilitate the earning of the director’s fees, the expenditure relating thereto was an expenditure incurred solely for earning the director’s fees and hence was allowable under sec. 12(2). (ii) The expenditure incurred in collecting the proxies from the shareholders cannot be regarded as an expenditure, even indirectly connected with the earning of the director’s fees and, hence, was not allowable under section 12(2). The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. 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. The section 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 11 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR deductible only if any income is made or earned (CIT vs. Rajendra Prasad Moody (1978), Taxation 51 (3)-52, 115 ITR 519 (SC) : CIT vs. Murli Manohar (1998) IX SITC 673 (All) : CIT vs. Rampur Timber & Turney Co. Ltd. (1981) 129 ITR 58 (All.) : CIT vs. Administrator General of Madras (1998) 142 Taxation 85 (Mad.). The 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)). Connection between the expenditure and earning of income need not be direct and it may be indirect. But, since the expenditure must have been incurred for the purpose of earning that income, there should be some nexus between the 12 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR expenditure and the earning of the income [Addl. CIT vs. Madras Fertilisers Ltd. (1980) 122 ITR 139 (Mad.) : Vijaya Laxmi Sugar Mills Ltd. vs. CIT (1991) 191 ITR 641 (SC): CIT vs. Dwaraka Chit Funds Pvt. Ltd. (1996) 132 Taxation 109 (Mad.). In CIT vs. K. P. Madan Mohan (1997) 136 Taxation 506 (Mad.), the assessee was an individual. His only activity was going to races at Madras and Bangalore. The A. Y. involved was 1973-74. The assessee joined a syndicate consisting of 13 members and the assessee purchased a ticket for Rs. 25/- and joined this pool which was betting on races. The syndicate winning jackpot an assessee’s share was determined at Rs. 48,669/-. The assessee claimed certain expenses which are disallowed and the entire receipt was taxed by the ITO under the head “other sources”. On appeal the AAC held that it could not be treated as income from undisclosed sources but was a share income from jackpot and the expenditure that would have been incurred for such restricted activity could be allowed. Before the Tribunal, the assessee produced his books as against claim for expenditure in regard to the jackpot at Rs. 16690/- apart from the other expenses such as audit fee, car maintenance, etc. After perusing the account books and following the provisions contained in section 56(2)(i)(b) and section 2(24) (ix) of the Act, the Tribunal allowed Rs. 15,000/- on estimate as a deduction u/s 57 (iii). The Bench noted that The aforesaid submission has been submitted before the 13 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR Ld CIT(A). But the Ld CIT(A) has confirmed the addition by mentioning that the learned AO in the assessment order has done the analysis of the funds and give a categorical finding that the appellant has not been able to show the nexus with respect to the utilisation of the business loan obtained from the bank wholly and exclusively for the purposes of earning of interest income from other sources. Further the business loan by nature and by the undertakings in the loan documents, can be used only for the purposes of business. In the appeal proceedings also the appellant has not been able to establish the nexus in his submissions. The Bench noticed the observation of the Ld. CIT(A) that the assessee has not been able to show the nexus with respect to the utilization of the business loan obtained from the bank wholly and exclusively for the purposes of earning of interest income from other sources is not correct. The assessee has specially mentioned that the loans so received by the assessee from ICICI bank were utilized for advancing the same to M/s Kandoi Metal Powder from where the assessee has received interest income. The interest received by the assessee has shown under the head 'income from other sources'. Hence the assessee has also claimed interest payment to ICICI Bank of Rs. 1,92,939/- under the head 'income from other sources. It is further noted that Ld CIT(A) has also mentioned that assessee has not established the nexus with the relevant material and the cash flow statement regarding the 14 ITA NO. 575/JP/2024 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR dates of the receipt of the loan from the bank and movement of funds and proving the nexus despite of the conclusion in the assessment order that the assessee has not been able to show the nexus. The assesseee has submitted the bank statement and ledger accounts of M/s Kandoi Metal Powder before the Learned Assessing Officer in all the transaction regarding receipt of loan and utilization thereof. The details working/utilization of loan is as under: - ‘’i. The assessee Shri Raj Kumar Kandoi has received a housing loan of Rs. 76,00,000/- from the ICICI Bank on 02/11/2011. Copy of ICICI Bank A/c no. 678801456944 reflecting the transactions are available on paper book page no. 1 to 2. ii. As the house is jointly owned by the assessee Shri Raj Kumar Kandoi, Smt. Shiwani Kandoi and Raj Kumar Kandoi HUF, so the equally amount of Rs. 25,33,300/- has been transferred to the bank account of Shri Raj Kumar Kandoi (other bank account of the assessee), Smt. Shiwani Kandoi and Raj Kumar Kandoi HUF. Copy of ICICI Bank A/c no. 678801456944 reflecting the transactions are available on paper book page no. 1 to 2. iii. The amount received by the assessee Shri Raj Kumar Kandoi was directly transferred to Kandoi Metal Powers Mfg. Ltd on the same day i.e. on 02/12/2011. A copy of bank account and ledger account reflecting the transactions are available on paper book page no. 3 to 4.
15 RAJ KUMAR KANDOI VS ACIT, CIRCLE-3, JAIPUR iv. The assessee transfer his entire share of loan amount to M/s Kandoi Metal Powers Mfg. Ltd on the same day i.e. on 02/12/2011 and regularly received interest from there. The interest income received from Kandoi Metal Powers Mfg. Ltd has been shown in income from other sources in every year including Assessment Year 2017-18. Hence the interest payment made to ICICI Bank of Rs. 1,92,939/- was rightly claimed by the assessee as deduction under the head income from other sources which is allowable u/s 57(iii) of the Income Tax Act, 1961. v. All the three owners of house i.e. the assessee Shri Raj Kumar Kandoi, Smt. Shiwani Kandoi and Raj Kumar Kandoi HUF are payment their of own ratio of installments of loan and all the transaction are entered in the books of accounts separately. We are enclosing the copy of interest payment ledger account in the books of the assesseee Shri Raj Kumar Kandoi, Smt. Shiwani Kandoi and Raj Kumar Kandoi HUF for the period 01.04.2016 to 31.03.2017 and these are available on paper book page no. 5 to 10. vi. The assessee submitted ledger account of ICICI Bank loan in the books of Shri Raj Kumar Kandoi, Smt. Shiwani Kandoi and Raj Kumar Kandoi HUF which proves that the assesses has used his total share of loan obtained for loan given to M/s Kandoi Metal Powerds Mfg. Ltd from where he has received interest and rightly claimed interest payment made to ICICI Bank of Rs. 1,92,939/-. Copy of ledger accounts of ICICI Bank loan in the books of Shri Raj Kumar Kandoi, Smt. Shiwani Kandoi and Raj Kumar Kandoi HUF are available on paper book page no. 11 to 13.