2023 (4) TMI 1164 - AT - Income Tax

Revision u/s 263 by CIT - Allowability of deduction u/s.57 - nexus between interest received from the firm and the interest paid to the bank on the term loan not developed - assessee claimed net interest income after claiming interest expenses u/s.57, i.e., interest paid on SBI term loan was claimed as expenditure allowable u/s.57 - assessee has taken term loan from SBI which was given to the partnership firm - HELD THAT - Assessee has received interest on capital contribution which has been shown separately. Apart from that, it has paid interest on loan taken from the assessee - The loan taken by the firm from the assessee, in turn was taken by the assessee from the SBI. Thus, the assessee received interest on loan given to the firm and on the same loan taken from the bank, the assessee has paid interest. Thus, there was direct nexus between earning of the interest income and interest paid. Accordingly, the netting of the net interest income after deducting the interest paid to the bank had direct nexus which is allowable under Section 57. This aspect of the matter was also examined by the AO and assessee has filed all the replies which were called upon by the AO. No infirmity in allowing the interest paid by the AO and therefore, order of ld. PCIT cannot be sustained, because on merits the assessment order is neither erroneous nor prejudicial to the interest of the Revenue and therefore, on merits, the appeal of the assessee is allowed.

Summary

Issues involved:
The issues involved in the judgment are the invocation of provisions of section 263 of the Income Tax Act, examination of interest expenses claimed by the assessee, and the sustainability of the order passed by the Principal Commissioner of Income Tax.

Provisions of Section 263 invoked:
The appellant filed an appeal against the order passed by the Ld. Pr. CIT, Mumbai-19, invoking the provisions of section 263 of the Act for the A.Y. 2017-18. The grounds of appeal raised by the assessee challenged the invocation of section 263 and setting aside of the order of the Ld. A.O. The appellant contended that the power to revise can be invoked in the case of lack of enquiry by the Ld. AO, and not in the case of inadequate enquiry.

Examination of interest expenses:
The assessee, an individual and partner in M/s. Ritesh Exports, declared a total income of Rs.94,85,830/-. The return of income was selected for limited scrutiny under CASS to examine the deduction against the head 'income from other sources'. The Assessing Officer accepted the return of income after examining the details related to interest income and the claim of interest deduction made by the assessee. However, the Ld. PCIT, in revisionary jurisdiction, found the order of the AO erroneous in relation to the interest expenses claimed on an SBI term loan. The Ld. PCIT observed that the AO had not verified the claim properly, leading to the cancellation of the assessment order.

Sustainability of the order passed by the Principal Commissioner:
The assessee submitted various details during the assessment proceedings to support the claim of interest expenses. However, the Ld. PCIT cancelled the assessment order, stating that the documentary evidences submitted did not establish the nexus between the expenses incurred and the interest income earned. The Ld. PCIT directed the AO to reframe the assessment after confirming the payment of interest by Ritesh Exports and verifying the nexus with income earned, based on relevant documentary evidences.

Merits of the case:
The assessee argued that there was a nexus between the interest received from M/s. Ritesh Exports and the interest paid to the bank on the term loan, making it allowable as a deduction under Section 57. The balance sheet of M/s. Ritesh Exports was presented to establish the usage of the loan for business purposes. The appellant contended that the AO had already verified and examined the issue, and the order should not have been set aside for re-examination.

Decision and Conclusion:
After considering the submissions and relevant findings, the Tribunal found that the interest expenses claimed by the assessee had a direct nexus with the interest income earned, making it allowable under Section 57. The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. Therefore, the appeal of the assessee was allowed, and the order pronounced on 31st March, 2023, favored the assessee.