SHRI PRANAY V. SHAH,.,BHAVNAGAR vs. THE INCOME TAX OFFICER, WARD-2(2), BHAVNAGAR

This appeal by the Assessee is preferred against the order of the Ld. CIT(A)-6, Ahmedabad dated 23.09.2015 pertaining to A.Y. 2012-13.

The assessee filed its return electronically on 24.12.2012 declaring total income at Rs. 5,60,720/-. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee.

During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has claimed deduction of Rs. 9,49,494/- on account of interest expenses on loans. The A.O. found that the same has been claimed as deduction from the income shown under the head “income from other sources”. The A.O. was of the opinion that the provision of Section 57(iii) of the Act allows deduction only when the purpose is relatable to the activity of the assessee in earning such income. The A.O. found that there was no direct nexus between the amounts of interest received and interest paid and, therefore, form a belief that the same cannot b allowed as deduction.

The A.O. asked the assessee to justify its claim of deduction of interest expenses of Rs. 9,49,494/-. Assessee filed a detailed reply stating that it is in the business of finance and therefore the money borrowed were advanced to various parties and on the borrowed funds, the assessee had paid interest whereas on the money advanced to various parties, the assessee has earned interest. The assessee claimed that there is a direct nexus between the interest earned and interest paid and therefore the deduction is to be allowed.

The reply field by the assessee did not find any favour with the A.O. who proceeded by disallowing the expenses of Rs. 9,49,494/-.

Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. Per contra, the ld. D.R. strongly supported the findings of the A.O.

We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the assessee is in the business of finance and therefore in pursuance of its business activities, the assessee has borrowed funds and has advanced the same to various parties. In the computation of income under the head “income from other sources”, the assessee has shown income of Rs. 6,53,773/-. We find that the assessee has shown interest earned on loans and advances at Rs. 15,91,426/-. We further find that the assessee has paid interest on loans at Rs. 9,49,494/-. These facts are as exhibited on page 42 of the paper book. We find that in earning the interest income of Rs. 15.91 lacs, the assessee has paid interest of Rs. 9.49 lacs. Exhibit 42 clearly shows the link between earning interest income and the payment of interest. In our considered opinion, the assessee satisfies the conditions laid down in Section 57(iii) of the Act and is therefore eligible for the claim of deduction of interest. We accordingly direct the A.O. to allow the claim of deduction of interest of Rs. 9,49,494/-. Appeal filed by the Assessee is allowed.