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2015 (1) TMI 1246 - AT - Income TaxClaim u/s 57(iii) denied - CIT(A) made disallowance of interst claimed as deduction u/s 57(iii) against interest income disclosed under the head Income from other Source - Held that - In the case of the assessee, we are of the opinion that there is a direct nexus between the money raised and utilized and the expenses by way of interest is also not of capital nature. During the instant year the assessee earned interest income of ₹ 15,99,664/- and claimed deduction of interest paid on borrowings to the tune of ₹ 3,97,244/- u/s 57(iii) of the Act. We in agreement with the submissions of the ld AR of the assessee that the interest paid constitute the input cost of the fund and therefore has to be reduced while determining the income from other sources which is the spirit of the provision of section 57 (iii) of the Act . In view of these facts, we reverse the order of CIT(A) by allowing the appeal of the assessee. - Decided in favour of assessee
Issues:
- Disallowance of interest claimed as deduction u/s 57(iii) of Income Tax Act - Interpretation of provisions of Sec 57(iii) of the Income Tax Act - Applicability of Supreme Court decisions in similar cases - Nexus between expenditure incurred and income earned - Claim for deduction of interest paid on borrowings u/s 57(iii) of the Act Analysis: Issue 1: Disallowance of interest claimed as deduction u/s 57(iii) of Income Tax Act The appeal was against the disallowance of interest amount claimed as deduction under section 57(iii) of the Income Tax Act. The assessee had disclosed interest income under the head "Income from other Source" and claimed deduction for interest paid. The Assessing Officer disallowed the deduction stating it was not directly connected with the earning of interest income. The CIT(A) upheld the disallowance, leading to the appeal. Issue 2: Interpretation of provisions of Sec 57(iii) of the Income Tax Act The main contention was whether the interest paid by the assessee on funds borrowed for repayment and advancing loans to other companies constituted a legitimate expense under section 57(iii) of the Act. The assessee argued that the interest paid was an admissible expense as it was utilized for advancing loans at a higher rate. Detailed financial statements and bank statements were submitted to establish the nexus between borrowings, lending, and interest paid. Issue 3: Applicability of Supreme Court decisions in similar cases The appellant argued that the decisions relied upon by the authorities were distinguishable from the present case. Reference was made to Supreme Court decisions like Seth R Dalmia (1977) and CIT Vs HH Maharani Shri VijayKuerba Sahib of Morvi (1975) to support the claim that expenses incurred for earning income, not of capital or personal nature, are deductible. Issue 4: Nexus between expenditure incurred and income earned The Tribunal analyzed the direct nexus between the funds raised, interest paid, and income earned by the assessee. It was observed that the interest paid constituted an indirect expense to earn the interest income from loans advanced to various companies. The Tribunal emphasized the importance of a connection between income and expenditure, even if indirect, to establish the deductibility of expenses. Issue 5: Claim for deduction of interest paid on borrowings u/s 57(iii) of the Act After considering the submissions and evidence presented, the Tribunal concluded that the interest paid by the assessee formed part of the input cost of funds and should be allowed as a deduction under section 57(iii) of the Act. The Tribunal reversed the decision of the CIT(A) and directed the Assessing Officer to allow the appeal of the assessee, stating that the interest paid had a direct nexus with the income earned. In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the direct connection between the interest paid on borrowings and the income earned from loans advanced. The decision highlighted the importance of interpreting provisions of the Income Tax Act in line with established legal principles and precedents set by higher courts.
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