2013 (10) TMI 1572 - AT - Income Tax

Summary

Issues involved: Dispute over the allowability of interest expenditure u/s 57(iii) of the IT Act against interest income earned from other sources.

Summary:
The appeal was filed against the order of the CIT(A) for the assessment year 2008-09, specifically challenging the disallowance of interest expenditure of Rs. 3,95,268/- while computing the total income. The assessee had borrowed funds to acquire shares of a company, from which interest income was earned. The AO disallowed the deduction of interest expenditure as there was no direct nexus between the borrowed funds and the interest income earned. The CIT(A) upheld this decision, emphasizing the requirement of a clear nexus between expenditure and income under section 57(iii).

During the appeal before the Tribunal, the assessee argued that the entire income from other sources should be considered for the allowability of expenditure u/s 57(iii), regardless of direct correlation. Citing relevant case laws, the assessee contended that expenditure incurred for earning income should be allowed even if no income was actually earned. However, the Departmental Representative argued that since the income from shares was not taxable, the corresponding interest expenditure could not be allowed as a deduction.

After careful consideration, the Tribunal found that the interest expenditure, related to acquiring shares with tax-free income, could not be set off against interest income from other sources. Referring to section 14A, it was clarified that expenditure in relation to income not "includible" in total income must be disallowed, even if the income was not actually earned. The Tribunal rejected the argument that all items of income from other sources should be considered together, as income from shares, in the form of dividends, had to be excluded from total income.

The Tribunal distinguished the case laws cited by the assessee, stating that they were not applicable to the present scenario with section 14A in place. Ultimately, the Tribunal upheld the decision of the CIT(A) and dismissed the appeal of the assessee.

In conclusion, the Tribunal confirmed the disallowance of interest expenditure against interest income earned from other sources, based on the provisions of section 14A and the lack of taxable income from the shares acquired.

(Order pronounced on 30-10-2013)