2018 (4) TMI 1768 - AT - Income Tax

Disallowance of interest expenditure u/s 57(iii) - whether the interest expenditure incurred by the assessee on the borrowed fund is an allowable expenditure under section 57(iii)? - HELD THAT - There is no denial that the money borrowed by the assessee was given to the sister concerns on which the assessee has earned the interest though the said interest was less than the expenditure incurred by the assessee. In the case in hand the facts and purpose of taking loans and giving to the sister concerns is not in dispute and, therefore, merely because the assessee has earned less interest and paid more interest cannot be a reason for disallowing the claim of the assessee. What is required for allowing the expenditure under section 57(iii) of the Act is the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. In the case in hand there is a direct connection and nexus between the expenditure incurred on account of interest paid and the interest income earned by the assessee on the loans and advances given to the sister concerns. AO in the scrutiny assessment passed under section 143(3) for the assessment year 2013-14 vide order dated 30th March, 2016 has allowed the claim of the assessee though it was restricted to the income under the head Other sources. Therefore, the AO for the assessment year 2013-14 has accepted the expenditure on account of interest incurred for earning the interest income and accordingly allowed the claim of the assessee to the extent of interest income. In view of the above facts and circumstances of the case as well as the decisions as cited supra, we find that the disallowance made by the AO is not justifiable. Accordingly the same is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the assessment order under section 143(3).
2. Non-application of the Supreme Court judgment in Commissioner of Income Tax vs. Rajendra Prasad Moody.
3. Disallowance of interest expenditure under section 57(iii).
4. Disallowance of brokerage expenses under section 57(iii).
5. Disallowance of interest expenses related to house property construction.
6. Determination of total income.
7. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order under Section 143(3):
The assessee contended that the assessment order passed under section 143(3) was bad in law and against the principles of natural justice. However, this issue was not elaborated upon in the judgment, indicating that the primary focus was on the disallowance of interest expenditure.

2. Non-application of the Supreme Court Judgment in Commissioner of Income Tax vs. Rajendra Prasad Moody:
The assessee argued that the AO erred by not following the Supreme Court's ruling in Commissioner of Income Tax vs. Rajendra Prasad Moody, which allows deduction of expenditure even if no income is earned. The AO and CIT(A) distinguished this case without providing specific reasons. The Tribunal noted that the purpose of the expenditure must be for earning income, and it need not fructify into actual income. This principle was upheld, supporting the assessee's claim.

3. Disallowance of Interest Expenditure under Section 57(iii):
The primary issue was the disallowance of interest expenditure claimed under section 57(iii). The AO disallowed the expenditure, arguing it was not incurred for earning income under the head "Other sources." The assessee contended that the interest was paid on short-term borrowings used to advance loans to sister concerns at a lower interest rate, a commercial decision. The Tribunal referenced several judgments, including the Gujarat High Court's ruling in Atir Textile Industries Pvt. Ltd. vs. DCIT, which allows deduction under section 57(iii) even if the interest paid exceeds the interest earned. The Tribunal found a direct nexus between the borrowed funds and the interest income, allowing the deduction.

4. Disallowance of Brokerage Expenses under Section 57(iii):
The AO also disallowed brokerage expenses incurred in raising loans. The Tribunal, referencing the same judgments, concluded that these expenses were incurred wholly and exclusively for earning interest income and should be allowed as deductions under section 57(iii).

5. Disallowance of Interest Expenses Related to House Property Construction:
The AO disallowed interest expenses related to the construction and acquisition of house property, arguing that the assessee did not establish a nexus between borrowed funds and their utilization. The Tribunal did not specifically address this issue in detail, focusing instead on the interest expenditure under section 57(iii).

6. Determination of Total Income:
The AO determined the total income of the assessee to be ?46,78,364/-, which was upheld by the CIT(A). The Tribunal's decision to allow the interest expenditure under section 57(iii) would impact this determination, reducing the total income.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c). The Tribunal's decision to allow the interest expenditure would likely affect the basis for these penalty proceedings, though the judgment does not explicitly address this issue.

Conclusion:
The Tribunal allowed the appeal, deleting the disallowance made by the AO and permitting the interest expenditure under section 57(iii). The judgment emphasized the relevance of commercial expediency and the direct nexus between expenditure and income, aligning with established legal precedents. The decision impacts the total income determination and potentially the penalty proceedings initiated under section 271(1)(c).