2016 (1) TMI 37 - AT - Income Tax

Disallowance of deduction of interest claimed - as per AO neither any income u/s. 56 of the Act had accrued to the assessee nor the interest liability arose in his individual hand, since it has been incurred in the capacity of the director - Held that - There is no dispute to the fact that the assessee who was a director of the company C.C. Engineers Pvt. Ltd. stood as a guarantor in his capacity as a director and an individual when the cash credit loan was obtained from the Rupee Cooperative Bank Ltd. He had guaranteed the said loan not on behalf of the assessee company, but in his capacity as director and individual for which, his own property was mortgaged to the bank. Since the company defaulted in making the payment, the assessee and other guarantors requested the bank to release the company from loan liability and allow them to take over the said liability personally, subject to payment of certain settlement amount and simple interest thereon. Thus, after taking over the loan of the company, the assessee became liable to the bank for which, the assessee had paid interest to the bank. Simultaneously, the assessee has received interest from the company on the amount of loan that has been transferred from the company to the assessee. Therefore, there is a direct nexus between the interest earned from the company and the interest paid to the bank. Under these circumstances, the interest expenditure, in our opinion, was rightly allowed by the Ld. CIT(A) u/s. 57(iii) of the Act. The decision relied on by the learned Departmental Representative in the case of CIT Vs. Dr. V.P. Gopinathan reported in (2001 (2) TMI 10 - SUPREME Court) is not applicable to the facts of the present case and is distinguishable. In that case, the assessee had earned interest on fixed deposits and has paid interest on loan taken on the security of fixed deposits. The assessee claimed the interest on such loan on fixed deposits as expenditure out of interest income. Under these circumstances, it was held that interest on loan taken by the assessee from the bank on the security of fixed deposits could not be reduced from his income by way of interest on fixed deposits placed by him in the bank - Therefore, this decision, in our opinion, is clearly distinguishable and not applicable to the facts of the present case. Decided against revenue

Summary

Issues:
1. Disallowance of interest expenditure claimed by the assessee.
2. Interpretation of provisions under section 57(iii) of the Income-tax Act.
3. Applicability of judgments in similar cases.

Issue 1: Disallowance of Interest Expenditure:
The case involved an appeal by the Revenue and a Cross Objection (CO) by the assessee against the order of the CIT(A)-III, Pune for A.Y. 2006-07. The assessee, an ex-director in a private limited company, had guaranteed a loan taken by the company from a cooperative bank. The company defaulted, leading the assessee to undertake to repay the loan personally. The assessee claimed interest paid to the bank as a deduction under section 57(iii) of the Act. However, the Assessing Officer disallowed the deduction on the grounds that the interest liability did not arise in the assessee's individual capacity. The CIT(A) overturned this decision, stating that the interest paid to the bank was an allowable expenditure incurred for earning interest income, as per section 57(iii).

Issue 2: Interpretation of Section 57(iii):
The CIT(A) held that the interest expenditure incurred by the assessee in paying the bank was wholly and exclusively for earning interest income, thus allowing it under section 57(iii). The CIT(A) emphasized that the interest income received from the company was directly linked to the interest paid to the bank, establishing a clear nexus. The Tribunal concurred with this interpretation, noting that the interest expenditure was rightly allowed under section 57(iii) due to the direct connection between the interest earned and interest paid by the assessee.

Issue 3: Applicability of Previous Judgments:
The Revenue, aggrieved by the CIT(A)'s decision, cited a judgment of the Hon'ble Supreme Court in a different case to argue against allowing the interest expenditure. The Tribunal, however, distinguished this case from the present situation, emphasizing the unique circumstances where the assessee had taken over the loan liability personally to relieve the company. The Tribunal found the cited judgment inapplicable, as it dealt with a different scenario involving fixed deposits. Ultimately, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's grounds of appeal.

In conclusion, the Tribunal affirmed the CIT(A)'s order, allowing the interest expenditure claimed by the assessee under section 57(iii) of the Income-tax Act. The decision highlighted the specific circumstances of the case, where the interest paid by the assessee to the bank was directly linked to the interest income received from the company, justifying the allowance of the deduction.