2019 (2) TMI 2034 - AT - Income Tax

Deduction in respect of interest paid u/s 57(iii) - Interest expenditure on borrowings utilized for advancing loan to the partners not allowable u/s. 57(iii) - CIT-A assessing the interest received on loans as income from other sources thereby upholding the order of the Assessing Officer treating the same as part of project cost - HELD THAT - As we observe that in this case there exists nexus between borrowings of money from the partner M/S Godrej Properties Ltd and lending out of that to two partners. Therefore, in our opinion, while assessing interest income received on loans from two partners namely M/s. Repton landmarks LLP and Mr. Ramesh P. Bhatia as income from other sources, deduction has to be allowed in respect of interest payment on loan to M/s. Godrej Properties Ltd. to equal extent. In our opinion decision cited by learned CIT(A) in the case of Dr. V.P. Gopinathan 2001 (2) TMI 10 - SUPREME COURT is clearly distinguishable on fact and not applicable in the present case. In our view, the assessee has proved direct nexus between borrowings and lending. Therefore we are not in agreement with the conclusion of learned CIT(A). Accordingly we set aside the order of learned CIT(A) and direct the Assessing Officer to allow deduction in respect of interest paid u/s 57(iii) of the Act while assessing interest income as income from other sources. Assessee appeal allowed.

Summary

Issues:
- Disallowance of interest expenditure on borrowings utilized for advancing loans to partners
- Treatment of interest income received on loans as income from other sources
- Allowability of deduction u/s 57(iii) of the Act

Analysis:
1. The primary issue in this case revolves around the disallowance of interest expenditure on borrowings used for advancing loans to partners. The Assessing Officer treated the interest expenditure as capital expenditure, disallowed it, and added it to the cost of construction. Simultaneously, the interest income received on loans was treated as income from other sources. The appellant contested this treatment, arguing that there was a direct nexus between the borrowings and lending, thus making the interest expenditure allowable u/s 57(iii) of the Act.

2. The learned CIT(A) dismissed the appeal, emphasizing that netting was not permissible, and the nature of the interest income earned was not in the course of the appellant's business, hence to be treated as income from other sources. The CIT(A) upheld the Assessing Officer's decision, stating that any increase in project cost would benefit the appellant in the long run. The CIT(A) concluded that the interest expense incurred had a remote reference, if any, to section 57.

3. In the appellate tribunal, the appellant argued that the authorities did not properly appreciate the case's facts. The appellant demonstrated a direct nexus between the borrowings from one partner and lending to two other partners. The tribunal observed this direct connection and disagreed with the CIT(A)'s conclusion. The tribunal directed the Assessing Officer to allow deduction u/s 57(iii) of the Act for the interest paid while assessing interest income as income from other sources.

4. The tribunal's decision highlighted the importance of establishing a direct nexus between borrowings and lending for the allowance of interest expenditure under section 57(iii) of the Act. By setting aside the CIT(A)'s order and allowing the appeal, the tribunal clarified that the interest expenditure should be deductible to the extent of interest income received on loans from partners. The judgment emphasized the need for a clear connection between financial transactions to determine the tax treatment of interest expenses and income in such cases.

5. The tribunal's ruling provided clarity on the treatment of interest expenditure and income in cases involving borrowings and lending activities. By recognizing the direct nexus between the financial transactions, the tribunal upheld the appellant's claim for deduction under section 57(iii) of the Act. This judgment serves as a precedent for cases where the tax treatment of interest expenses and income is contingent on the relationship between borrowings and lending activities, emphasizing the importance of establishing a direct connection for tax purposes.