SHRI GIRISHBHAI VADILAL SHAH,,AHMEDABAD vs. DCIT, CIRCLE-5(2),, AHMEDABAD

PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER:

This appeal filed by the Assessee is directed against the order of Learned Commissioner of Income-Tax (Appeals), Ahmedabad-5 [hereinafter referred to as “Ld. CIT(A)” for short] dated 08/12/2017 passed for Assessment Year (AY) 2013-14. 2. The assessee has raised the following grounds of appeal: Asst. Year 2013-14

“1. That the LD. A.O. has erred both in law and on facts while disallowing of interest expenses of Rs.54,32,948/- of the I.T. Act. 1961. Hence, it is required to be deleted.

section 57(iii) of the Act. The working of the disallowance is narrated at Paragraph No.5.10 of the assessment order as under: “5.10 In view of the above facts and the legal discussion made, the interest expenses claimed by the assessee u/s.57(iii) are not allowable to the extent they are attributable to the lower interest charged by the assessee than 12% pa on the advanced made. The same have been worked out in the following manner:

Sr.No. Name Interest Rate of Amt. of interest interest chargeable @ 12%

As is evident from the order of the AO reproduced above, he has disallowed that portion of the interest expense incurred on loans taken which was in excess of the interest charged on loans given by the assessee. Which means that in sum and substance he accepted the usage of interest bearing funds for earning interest income when he allowed that portion of interest expense which was in parity with the interest charged by the assessee on loans/advances given. Having accepted this fact therefore the AO was precluded from making any disallowance of interest u/s 57(iii) of the Act since the only requirement to be fulfilled for claiming expenses under the said section is that they must have been incurred wholly and exclusively for the purpose of earning income from other sources. What is relevant therefore is only the nexus of expenditure for earning income and the quantum of expenditure incurred therefore is of no consequence.

The Assessing Officer in his order passed u/s.143(3) of the Act himself interprets the provisions of section 57(iii) of the Act and notes that for allowability of expenses under the said section, the nexus of the expenditure with the earning of income is essential conditions to be fulfilled as reproduced at Paragraph No.5.5 of his order as under:

“5.5 From the above, provisions, it can be appreciated that deduction from interest income is allowable u/s.57(iii) only. An analysis of this sub- section would show that in computing the income under this head the assessee is entitled to deduction in respect of the expenditure incurred solely for the purpose of earning such income, provided the expenditure is not of a capital nature and does not include any personal expenses incurred by the assessee. In other words, before this provision could apply, the following conditions must be fulfilled:

(i) the expenditure must have been incurred solely and exclusively for the purpose of earning income or making profit; Asst. Year 2013-14

(ii) the expenditure should not be in the nature of a capital expenditure; (iii) the amount in question should not be in the nature of personal expenses of the assessee; (iv) that the expenditure should be incurred in the accounting year; and (v) There must be a clear nexus between the expenditure incurred and the income sought to be earned.”

“5. 6. Now coming to the reply of the assessee and the contention that primary motive of incurring interest by the assessee is to earn income falling under the head ‘income from other sources’. This contention of the assessee, however is devoid of substance, in view of the fact that the amount of interest paid by the assessee is higher than the amount of interest received. Had the primary motive of the assessee been to earn interest, no loss would have been possible on this account.”

income. There is no question of interpreting the term “income as profits”. The moment expenditure has been incurred for earning income, the expenditure incurred for the same qualifies for deduction u/s.54(iii) of the Act. In the present case, it is not disputed that the assessee has earned interest income of Rs.1,08,39,837/-. Therefore, the Assessing Officer’s finding that there is no income is factually incorrect and this basis of the Assessing Officer is, therefore, for denying the assessee’s claim of expenditure u/s.57(iii) of the Act is liable to be quashed.

Besides, there is again a basic fallacy in the reasoning as above of the Revenue authorities since as noted above by us they themselves have allowed a portion of the interest expense disallowing only the excess in comparison to the interest income earned. If no income was earned by the assessee, as is the case of the Revenue authorities, then the entire interest expense ought to have been disallowed.

Further, we find that the Assessing Officer mentions at Paragraph No.5.8 in his order that the assessee claimed to have been interest from his OD account with Kalupur Bank for lending money and receiving money and thus establishing nexus between the funds borrowed on interest and utilized for making advances for earning interest thereon for claiming interest expenses against the interest income earned. We find that the Assessing Officer has dismissed this contention of the assessee stating that there ought to be a clear nexus between the expenditure incurred and the income earned as observed by the Hon’ble Apex Court in its decision reported at 110 ITR 664. The Assessing Officer has not stated as to how in the light of the facts stated by the assessee, the nexus was not established, he Asst. Year 2013-14

has just summarily dismissed the contention of the assessee. In the absence of the Assessing Officer pointing out as to how despite the assessee’s explanation, there was no nexus between the interest bearing- funds and their utilization for making advances for earning interest income, no disallowance u/s 57(iii) of the Act was tenable.

In view of the above, we hold that the disallowance of interest expenses u/s.57(iii) of the Act confirmed by the Ld.CIT(A) was incorrect and unwarranted. The same is, therefore, directed to be deleted. Thus, grounds of appeal of the assessee are allowed.

Order pronounced in the Court on 15th March, 2024 at Ahmedabad. (ANNAPURNA GUPTA) JUDICIAL MEMBER

Ahmedabad, Dated 15/03/2024 ट".सी.नायर, व."न.स./T.C. NAIR, Sr. PS Asst. Year 2013-14

आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant

आदेशानुसार/ BY ORDER,

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सहायक पंजीकार (Asstt.