2018 (2) TMI 297 - AT - Income Tax

Disallowance of interest - assessee had claimed that his minor daughter had paid the same to related parties for making investment in the guest house - no income from the guest house has accrued to the minor daughter of the assessee - Held that - The income from other sources is taxable under the provisions of I.T. Act and these provisions are contained in section 56 onwards. The deductions permitted to be made from the income u/s 56 are contained in section 57 of the Act. The deductions as contained in section 57 are specific and apply to various income under the head income from other sources. Clause (iii) of section 57 states that any other expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income will be allowed as deduction against income from other sources. The assessee had not been able to substantiate that the interest paid by his minor daughter was for earning of any income as defined in section 56 as income from other sources. Rather the assessee has made out a case that the interest was paid on borrowed funds which were utilized for construction of guest house and which too had not become operational. Therefore, we find that authorities below have rightly disallowed the claim. As regards disallowance of interest which the assessee had paid for earning of income under the head income from other sources, we find that the assessee had earned a gross income of ₹ 20,87,296/- which includes interest on FDR and which the assessee has claimed to have utilized the borrowed funds for earning interest. Therefore, this deduction claimed by the assessee is directly covered by the provisions of clause (iii) of section 57 which allows deduction for any expenditure incurred wholly and exclusively for the purpose of earning such income. We further find that the assessee has duly deducted TDS and further the payment of interest is evidenced from the copy of account of lender which reflects that there was opening balance of ₹ 11,08,000/- as unsecured loan in the hands of the assessee. Therefore, we are in agreement with the arguments of the assessee that disallowance was not warranted as the same was paid for earning of the income. - Decided partly in favour of assessee

Summary

Issues:
1. Disallowance of charity and donation amount.
2. Disallowance of interest amount of ?2,29,353.
3. Disallowance of interest amount of ?1,22,512.

Analysis:
1. Disallowance of Charity and Donation:
The appellant contested the disallowance of ?26,000 on account of charity and donation. However, the appellant decided not to press this ground, leading to its dismissal as not pressed.

2. Disallowance of Interest - ?2,29,353:
The appellant argued that the interest disallowed was related to a loan taken for constructing a guest house, which was funded by a third party. The appellant claimed that since the guest house did not generate any revenue during the relevant year, no income was declared. The appellant contended that since all income and expenditure of the minor daughter were clubbed with the appellant's income, the disallowance of interest paid was unjustified. The tribunal, however, found that the interest paid by the minor daughter was not for earning income as defined in the Income Tax Act and upheld the disallowance.

3. Disallowance of Interest - ?1,22,512:
Regarding the disallowance of ?1,22,512, the appellant argued that the borrowed funds were utilized for earning interest income, which was offered to tax. The appellant highlighted that the interest paid was deductible from the income earned from other sources. The tribunal observed that the appellant had earned a gross income of ?20,87,296, including interest on Fixed Deposit Receipts (FDRs). The tribunal found that the appellant had deducted TDS on the interest paid and had utilized the borrowed funds for earning interest income. Consequently, the tribunal allowed this ground of appeal.

In conclusion, the tribunal partially allowed the appeal, dismissing the disallowance related to the charity and donation amount while upholding the disallowance of interest amounting to ?2,29,353 and allowing the deduction of interest amounting to ?1,22,512.