2019 (10) TMI 393 - AT - Income Tax

Disallowance of interest expenses u/s 57(iii) - HELD THAT - Section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively 'for the purpose of making or earning such income . In order that expenditure may be admissible under section 57(iii), it is necessary that the primary motive of incurring it is directly to earn income falling under the head income from other sources . The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify, the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. In the present case M/s Finesse jewels is engaged in the business of manufacturing of gems and jewellery. The assessee is a director and shareholder in such company and derives salary and commission income from such company. It has made investment in the company for the purpose of earning the income from the investment either in the form of interest or in the form of dividend or capital gain. Therefore such an advance was clearly given by the assessee for the purpose of commercial expediency. It is to be noted that any advance made to the related/sister concern out of commercial expediency is allowable under the income tax return and any expenses claimed in respect of such advance given can be claimed as deduction u/s 57(iii) /37 of the income tax act, 1961. We allow the claim of the assessee and delete the additions made by the AO and upheld by the ld. CIT(A). In the result, this ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 57(iii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 57(iii):

The primary issue in this case is whether the interest expenses amounting to ?7,79,478/- claimed by the assessee under Section 57(iii) of the Income Tax Act, 1961, should be allowed as a deduction. The assessee contends that these expenses were incurred wholly and exclusively for the purpose of making or earning income from other sources.

Facts of the Case:
The assessee, an individual deriving income from salary, commission, capital gains, and interest, filed a return declaring a total income of ?17,04,990/-. The case was selected for limited scrutiny under Section 143(3), leading to the disallowance of interest expenditure amounting to ?7,79,478/-.

Assessee's Arguments:
The assessee argued that the unsecured loans taken were used for advancing loans to other parties and making investments in M/s Finesse Jewels Pvt. Ltd., where the assessee is a director and shareholder. The total interest received from loans advanced was ?4,21,667/-, and the total investment in Finesse Jewels was ?52,29,785/- as of 31.03.2014. The interest paid on unsecured loans during the year amounted to ?12,01,145/-. The assessee asserted that all funds were utilized for earning interest income or for business purposes, not for personal use.

Revenue's Arguments:
The Revenue authorities, including the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)], disallowed the interest expenses, arguing that the expenditure was not incurred wholly and exclusively for earning income. They contended that no prudent person would incur a loss by obtaining loans at a higher interest rate and advancing them at a lower or nil interest rate.

Tribunal's Findings:
The Tribunal examined the details provided by the assessee, including the rates of interest on loans advanced and unsecured loans taken. It was noted that the interest rates on loans advanced (14.40% to 15%) were not lower than the rates on unsecured loans (12% to 15.60%). The Tribunal found that the AO had not considered these details and had erroneously concluded that the assessee advanced loans at lower rates.

Commercial Expediency:
The Tribunal emphasized the concept of "commercial expediency," which includes expenditures incurred for business purposes, even if not under legal obligation. It was noted that the assessee had advanced funds to M/s Finesse Jewels Pvt. Ltd., a related concern, for business purposes, and such advances were made out of commercial expediency. The Tribunal cited several case laws, including the Supreme Court's decision in SA Builders Limited, which supported the assessee's contention that advances made out of commercial expediency are allowable deductions under Section 57(iii).

Conclusion:
The Tribunal concluded that the interest expenditure was incurred wholly and exclusively for earning income under the head "Income from Other Sources." The Tribunal allowed the assessee's claim for deduction under Section 57(iii) and deleted the additions made by the AO and upheld by the CIT(A).

Final Order:
The appeal of the assessee was allowed, and the disallowance of interest expenses was deleted. The Tribunal pronounced the order in the open court on 03/10/2019.