2015 (10) TMI 163 - AT - Income Tax

Disallowance of interest expenses - CIT(A) deleted the addition - Held that - There is no dispute as regard to expenditure of interest incurred by the assessee. The interest has been incurred on the loan received from Mahima Trading & Investment Pvt.Ltd., CMC (I) Pvt.Ltd. and SBI on OD account. During the course of hearing, a query was raised by the Bench to the ld.counsel for the assessee as to when FDR was made and when the OD facilities from SBI was taken by the assessee. It was also asked from the ld.counsel for the assessee whether the interest was paid to the bank towards the money out of which Fixed Deposit was made and earned interest therefrom. We find that this aspect is not examined by the ld.CIT(A) whether the interest paid to the bank was towards the money deposited for the purpose of making FDR wherefrom the assessee has earned interest income. Therefore, the issue is remitted back to the file of ld.CIT(A) to decide it afresh and he is directed to verify whether the interest claimed as expenditure by the assessee has direct nexus to the amount deposited by the assessee for making FDR. If the amount so taken from the parties was not utilized for the purpose of making fixed deposit where from the assessee has earned the interest, under such circumstances, the assessee would not be entitled for deduction of the expenditure claimed u/s.57 of the Act. - Decided in favour of revenue for statistical purposes Expenditure u/s.57 towards the interest paid to Mahima Trading & Investments Pvt.Ltd., CMC(I) Pvt.Ltd. and SBI disallowed - Held that - During the course of hearing, a query was raised by the Bench to the ld.counsel for the assessee as to when FDR was made and when the OD facilities from SBI was taken by the assessee. The ld.counsel for the assessee could not give any explanation as to whether the amount paid to SBI was towards the amount taken as loan for making the FDR. In the absence of such material, we do not find any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. - Decided against assessee.

Summary

Issues:
1. Deletion of addition of interest expenses by the Assessing Officer.
2. Allowability of interest expenses claimed by the assessee under section 57 of the Income Tax Act, 1961.
3. Disallowance of interest expenses by the Assessing Officer and confirmation by the Commissioner of Income Tax (Appeals).

Issue 1: Deletion of addition of interest expenses by the Assessing Officer:
The Revenue appealed against the deletion of an addition of Rs. 21,21,783 made by the Assessing Officer as disallowance of interest expenses. The Commissioner of Income Tax (Appeals) allowed the appeal filed by the assessee, leading to the Revenue's appeal before the Appellate Tribunal ITAT Ahmedabad. The Tribunal observed that the interest expenses claimed by the assessee were related to income earned from saving accounts and Fixed Deposits, primarily from the State Bank of India. The Tribunal noted that the Commissioner of Income Tax (Appeals) had deleted the addition based on Section 57(iii) of the Income Tax Act, which allows deduction for expenses laid out wholly and exclusively for earning such income. However, the Tribunal remitted the issue back to the Commissioner to verify the direct nexus between the interest claimed as expenditure and the amount deposited for making Fixed Deposits, emphasizing the need for a clear link for the deduction to be allowed.

Issue 2: Allowability of interest expenses claimed by the assessee under section 57 of the Income Tax Act, 1961:
In the case of the assessee for Assessment Year 2008-09, the Tribunal analyzed the claim of interest expenses under Section 57 of the Income Tax Act. The Commissioner of Income Tax (Appeals) had allowed the deduction of interest expenses based on the direct link between the interest paid and interest received by the assessee. The Tribunal highlighted that the interest payments were made to entities from which the assessee had borrowed money to make Fixed Deposits, establishing a clear interlinking of interest payment and interest received. However, the Tribunal directed the Commissioner to re-examine the issue to ensure that the interest claimed as expenditure had a direct nexus to the amount deposited for making Fixed Deposits, indicating the importance of establishing a clear connection for allowable deductions under Section 57 of the Act.

Issue 3: Disallowance of interest expenses by the Assessing Officer and confirmation by the Commissioner of Income Tax (Appeals):
In the case of Assessment Year 2009-10, the assessee appealed against the confirmation of the addition of Rs. 3,25,724 disallowed by the Assessing Officer as interest expenses paid to State Bank of India. The Commissioner of Income Tax (Appeals) upheld the addition, stating that the claim of interest expenses under Section 57 was not allowable as the appellant had not paid interest on borrowed money and earned interest from that borrowed money by making Fixed Deposits. The Tribunal supported the Commissioner's decision, emphasizing the sequence of events where the earning of interest preceded the expenditure on interest. The Tribunal noted that the appellant failed to provide clarification regarding the relationship between the amount paid to the bank and the loan taken for making Fixed Deposits, leading to the dismissal of the assessee's appeal and upholding of the addition.

In conclusion, the Appellate Tribunal ITAT Ahmedabad allowed the Revenue's appeal for Assessment Year 2008-09 for statistical purposes and dismissed the Assessee's appeal for Assessment Year 2009-10, highlighting the importance of establishing a direct nexus between interest expenses claimed and the income earned for allowable deductions under Section 57 of the Income Tax Act.