2021 (3) TMI 1354 - AT - Income Tax

Disallowances of deduction claimed on account of interest expenditure claimed against interest income - HELD THAT - The assessee has demonstrated from the record that the activity of the assessee of taking interest bearing loan and making advances to other parties is continued for the last so many years. The assessee in this activity has earned net positive interest income. In our view in such a case, there is no need to establish one to one nexus between each of the transaction of loan taken and loan advanced by the assessee. There transactions of taking unsecured loans otherwise has not been disputed by the Department. Even the AO has not made any effort to verify the genuineness of the transaction by summoning the concerned parties either who have advanced loan to assessee or the parties have taken loan from the assessee. There is no allegation that the assessee has used the interest bearing funds for some other purposes. Under the circumstances, in our view, the assessee is entitled to set off the interest expenditure against the interest income earned by the assessee and the net of the same has rightly been offered by the assessee for taxation Addition made by the Assessing Officer is ordered to be deleted - Decided in favour of assessee.

Summary

Issues:
Disallowance of deduction claimed by assessees on account of interest expenditure against interest income.

Analysis:
The appeals were filed by related assessees against the orders of the Commissioner of Income Tax (Appeals) regarding the disallowances of deductions claimed on interest expenditure against interest income. The common issue in all appeals was the disallowance of deduction claimed by the assessees on account of interest expenditure against interest income. The case involved a scenario where the assessee received interest income on unsecured loans and savings/fixed deposits, while also paying interest on unsecured loans and loans against property. The Assessing Officer disallowed the interest expenses claimed by the assessee as a deduction against interest income, citing a lack of direct nexus between the two. The first appeal confirmed the disallowances made by the Assessing Officer, leading the assessees to appeal before the tribunal.

The counsel for the assessee argued that the assessee was engaged in the activity of giving and taking loans on interest, resulting in a net positive interest income. It was highlighted that this activity had been ongoing for many years, with no additions made by authorities in previous or subsequent assessment years. The counsel emphasized that the genuineness of the loan transactions was not disputed, and the only issue was the establishment of a direct nexus between loans taken and loans advanced. It was also noted that the assessee had sufficient own funds, but this did not imply that interest-yielding loans were funded by own funds. The tribunal considered the arguments and observed that the activity of taking interest-bearing loans and making advances had been consistent over the years, with no need to establish a one-to-one nexus between each transaction. The tribunal found no effort by the Assessing Officer to verify the genuineness of the transactions or any misuse of interest-bearing funds. Consequently, the tribunal ruled in favor of the assessee, ordering the deletion of the addition made by the Assessing Officer.

In conclusion, the tribunal allowed all three appeals, noting that the facts and issues involved were identical. The tribunal held that the assessee was entitled to set off the interest expenditure against the interest income earned, leading to the deletion of the additions made by the lower authorities.