2018 (5) TMI 1606 - AT - Income Tax

Disallowance on interest payment claimed U/s 57 - Assessee has availed housing loan from State Bank of India - denial of claim as the assessee has claimed the same U/s 57 against the interest income received by him and not under the head of income from house property - Held that - Before allowing the interest expenditure against the interest income, the burden is on the assessee to prove that the amount so borrowed has been actually and directly used for the purpose of advancing loan on which interest income has been earned. One to one link is required to be established in respect of utilization of interest bearing funds so borrowed. Merely because the loan was sanctioned for housing purpose, it cannot be said that the assessee cannot use it for advancing loans to others for earning interest. It may amount to violation of terms and conditions of the agreement so entered with the bank while sanctioning of the loan, but there is no contravention under the Income Tax Act for advancing such funds for earning interest income. There is no finding by the lower authorities that the interest earned out of advances were not out of interest bearing funds taken from bank. Restore this issue back to the file of the Assessing Officer for deciding afresh and the assessee is directed to demonstrate one to one use of borrowed funds for advancing loan on interest.

Summary

Issues Involved:
1. Disallowance of interest payment claimed under Section 57 of the Income Tax Act, 1961.
2. Establishment of a direct nexus between borrowed funds and advances given for earning interest income.
3. Application of Section 24 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest Payment Claimed Under Section 57:
The primary issue in these appeals is the disallowance of interest payment claimed by the assessee under Section 57 of the Income Tax Act, 1961. The assessee had taken a one-time house loan from the State Bank of India for constructing a house and claimed the interest paid on this loan as a deduction under Section 57 against the interest income earned from various advances. The Assessing Officer disallowed this claim, and the CIT(A) confirmed the disallowance, stating that the housing loan was utilized for house construction and not for earning interest income.

2. Establishment of Direct Nexus Between Borrowed Funds and Advances Given for Earning Interest Income:
The assessee argued that the funds borrowed from the bank were directly transferred to parties for earning interest at higher rates. The assessee provided corroborative evidence, including bank statements and explanations, to support the claim that the borrowed funds were used for advancing loans to earn interest income. The Tribunal noted that the burden is on the assessee to prove the direct utilization of borrowed funds for advancing loans. The Tribunal emphasized that a one-to-one link between the borrowed funds and the advances given for earning interest must be established. The Tribunal restored this issue back to the Assessing Officer for fresh adjudication, directing the assessee to demonstrate the direct use of borrowed funds for advancing loans on interest.

3. Application of Section 24 of the Income Tax Act, 1961:
The Tribunal observed that if the assessee fails to establish a direct nexus between the borrowed funds and the advances given for earning interest, the interest paid should be allowed against the income under the head "Income from House Property" as per the provisions of Section 24 of the Act. The Tribunal directed the Assessing Officer to consider this provision while re-examining the case.

Conclusion:
The Tribunal allowed the appeals in part for statistical purposes, directing the Assessing Officer to re-examine the direct nexus between the borrowed funds and the advances given for earning interest income. The Tribunal also instructed the Assessing Officer to consider the applicability of Section 24 if the direct nexus is not established. The order was pronounced in the open court on 25/05/2018.