2020 (1) TMI 1245 - AT - Income Tax

Claim of interest expenditure against the interest income declared under the head income from business and income from other sources - case of the Revenue is that the interest on partnership firm has been shown under the head Business Income against which no expenses have been claimed and interest from other parties have been shown under the head Income from other sources against which the whole of interest expense has been claimed - HELD THAT - There appears to be mistake on part of the assessee in terms of claiming the whole of the interest expenditure against income from other sources rather than claiming it proportionally against interest from partnership firm and other parties, however, the substance of the matter is that where there is a nexus established between the borrowed funds and lending thereof, as in the instant case, a principle which is relevant both in context of business income and income from other sources, therefore, in such circumstances, there is no basis for disallowance of interest expenditure. The fact that the assessee has wrongly claimed the same in the return of income under one head instead of both the heads proportionally is not a bar against allowance of such claim of expenditure under respective heads when the substance of the transaction that the borrowed funds have been utlised for subsequent lending has not been disputed by the Revenue and a specific contention was raised before the lower authorities. In the result, the ground of appeal is allowed. Agricultural income or not? - Discharge of onus - HELD THAT - The fact that the assessee has shown agriculture income and the same has been claimed as exempt from tax. The onus is clearly on the assessee to demonstrate carrying on of the agriculture operations during the year and earning of agricultural income. In absence of the same, merely by stating that the assessee owns 1.33 bigha of land at village Mangarh, Tehsil is not sufficient to discharge the onus cast on him. The findings of the lower authorities therefore remain uncontroverted before us and the same are hereby confirmed. In the result, the ground of appeal is dismissed.

Summary

Issues:
1. Disallowance of interest expenditure against interest income
2. Treatment of agricultural income as non-agricultural income

Analysis:

Issue 1: Disallowance of interest expenditure against interest income
The appeal was filed against the disallowance of interest expenditure of &8377; 6,63,196 against the interest income declared under the heads "income from business" and "income from other sources." The Assessing Officer disallowed the claim as the assessee failed to provide a satisfactory explanation on how the interest expenses were related to the earning of interest income. The CIT(A) upheld the disallowance stating that the interest expenditure was not claimed against the interest income from the partnership firm. However, the appellant argued that the borrowed funds were utilized for earning interest income, and there was no restriction in claiming the deduction under different heads of income. The Tribunal agreed with the appellant, emphasizing the nexus between the borrowed funds and the subsequent lending, allowing the claim of interest expenditure.

Issue 2: Treatment of agricultural income as non-agricultural income
The appellant declared agricultural income of &8377; 45,600 from land at village Mangarh. The AO treated it as income from other sources due to the lack of evidence of agricultural operations. The CIT(A) confirmed the addition, noting the absence of irrigation, nature of crop, and cash receipts. The appellant contended that the agricultural income was regularly declared and should not be disallowed merely due to the land not being irrigated presently. However, the Tribunal upheld the lower authorities' findings, emphasizing the burden on the assessee to prove agricultural operations and income, leading to the dismissal of the appeal on this ground.

In conclusion, the Tribunal partly allowed the appeal, directing the deletion of the disallowance of interest expenditure against interest income while dismissing the appeal regarding the treatment of agricultural income as non-agricultural income.