2023 (9) TMI 319 - AT - Income Tax

Disallowance of interest expenses u/s 57 - nexus between the interest income from FDs and the interest paid by the assessee - AO has contended that the assessee failed to establish the nexus of the FD balance as of 31/03/2017 and the details of the loan amount borrowed from related parties as provided by the assessee - It is the claim of the assessee that the FDs are placed using the funds borrowed in earlier years from the related parties and therefore the revenue cannot make the disallowance in the years under consideration for the reason that the assessee failed to establish the nexus HELD THAT - During the course of hearing our attention was drawn to Balance Sheet of the assessee as at 31/03/2017 and 31/03/2018 to submit that there cannot be a one to one match between the loan amount used for investing in FD and used for business. We tend to agree with this contention for the reason that one of the partners' capital account is having a considerable credit balance (own funds) and there is also sizeable balance shown under the head Span Margin in the asset side which substantiates the claim that there is no one to one match between the source and the investments. The claim of the assessee that the amount borrowed from related parties has been used for investment in FD as well as business purpose has merits. Be that as may be for the purpose of claiming deduction under section 57, it is important to establish that the expenditure (not being in the nature of capital expenditure) is laid out or expended wholly and exclusively for the purpose of making or earning such income. In assessee's case the assessing officer has not considered the movement in the loan account details submitted by the assessee and also has not considered the fresh FDs and renewal of FDs before concluding that the entire claim is not allowable u/s 57. Alternate plea of the assessee that the interest expenditure if disallowed u/s 57 should be allowed as business expenditure for the reason that the FDs are kept for business purpose has also not been considered by the lower authorities - In view of these discussions we deem it fit to remit the issue back to the assessing officer for a de novo consideration. AO is directed to consider the movement in the FD account and the loan account to understand the nexus and also to consider the alternate claim of interest as business expenditure based on the facts and evidences that may be submitted by the assessee. Appeal allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest expenses under section 57 of the Income-tax Act, 1961.
2. Nexus between borrowed funds and fixed deposits.
3. Alternate claim of interest expenses as business expenditure.

Summary:

1. Disallowance of Interest Expenses under Section 57:
The assessee, a partnership firm engaged in trading shares, filed returns for A.Y. 2017-18 and 2018-19 declaring nil income. The returns included claims for interest on loans and overdrafts, with significant portions claimed under section 57 of the Income-tax Act, 1961. The Assessing Officer disallowed these claims, stating that the assessee failed to establish that the expenses were incurred wholly and exclusively for earning income under section 56.

2. Nexus Between Borrowed Funds and Fixed Deposits:
The Assessing Officer noted unsecured loans taken from individuals at 9% interest, while the assessee had fixed deposits earning 6.25% interest. The Officer held that the assessee could not establish the nexus between the fixed deposits and the loans borrowed, leading to the disallowance of interest expenses. The CIT(A) upheld this disallowance, agreeing that the nexus was not established and rejecting the alternate claim for business deduction.

3. Alternate Claim of Interest Expenses as Business Expenditure:
The assessee argued that the loans were invested in fixed deposits and the interest paid should be allowed as a deduction under section 57. Alternatively, if disallowed under section 57, it should be allowed as a business deduction. The Tribunal found merit in the assessee's claim that borrowed funds were used for both business purposes and fixed deposits. The Tribunal noted that the Assessing Officer did not consider the movement in loan accounts and fixed deposits. The Tribunal remitted the issue back to the Assessing Officer for de novo consideration, directing the Officer to understand the nexus and consider the alternate claim based on the facts and evidence submitted by the assessee.

Conclusion:
The appeals for A.Y. 2017-18 and 2018-19 are allowed for statistical purposes, with directions for the Assessing Officer to reconsider the issues based on the Tribunal's observations and provide the assessee a reasonable opportunity of being heard.