2019 (12) TMI 867 - AT - Income Tax

Disallowance of claim of interest expenses on assumption and presumption basis - disallowance of interest only in respect of one transaction of payment of interest @ 20% whereas the assessee has earned the interest at the maximum rate of 18% - AO has restricted the payment of interest to 18% - HELD THAT - When the AO has not disputed the correctness of the payment and genuineness of the transaction, then merely because the payment of interest to one of the parties is higher than the average earning of interest, the same cannot be a reason for disallowing the claim of interest expenditure. The only requirement for allowing the deduction under section 57(iii) is that the expenditure has been incurred wholly and exclusively for the purpose of earning the income. Thus the purpose of expenditure is relevant and not the end result of such expenditure laid out by the assessee. When the interest expenditure was laid out by the assessee for earning the interest income, then the rate of interest for payment of interest is not relevant for the purpose of allowing the deduction under section 57(iii) of the Act. The authorities below have committed an error while disallowing the claim of interest on the ground that the payment in case of one party is at a higher rate than the interest earned by the assessee from such expenditure. The orders of the authorities below are accordingly set aside and claim of the assessee is allowed.

Summary

Issues:
1. Disallowance of interest expenses based on assumption and presumption.
2. Allowability of interest expenditure under section 57(iii) of the Act.
3. Justification of interest payment at a higher rate than interest earned.

Issue 1: The assessee challenged the disallowance of interest expenses by the Assessing Officer (AO) before the ld. CIT (A) and subsequently before the Tribunal. The AO restricted the interest paid against the interest received by applying a lower rate, leading to disallowance. The assessee contended that the action of the AO was unjustified and not sustainable in law.

Issue 2: The ld. A/R of the assessee argued that the interest expenditure incurred by the assessee for earning interest income is allowable under section 57(iii) of the Act. Citing relevant legal precedents, including the decision of the Hon’ble Supreme Court, it was emphasized that the purpose of the expenditure is crucial for deduction under section 57(iii), irrespective of whether income is actually earned. The contention was that the disallowance made by the AO and confirmed by the ld. CIT (A) was not justified in law.

Issue 3: The Tribunal analyzed the interest income and payments made by the assessee to various parties. Despite paying interest at a higher rate to some parties than the interest earned, the Tribunal held that the genuineness of the payments was not in question. It was noted that the purpose of expenditure for earning income is paramount under section 57(iii), and the rate of interest for payment is not a deciding factor for deduction. Legal judgments were cited to support the argument that tax planning is a legitimate right of the assessee, and the Tribunal concluded that the interest expenditure was allowable as claimed by the assessee.

In conclusion, the Tribunal allowed the appeal of the assessee, setting aside the orders of the authorities below and allowing the claim of interest expenditure under section 57(iii) of the Act. The judgment emphasized the importance of the purpose of expenditure for earning income, irrespective of the rate of interest paid, and upheld the principle that tax planning within legal boundaries is permissible.