2024 (6) TMI 523 - AT - Income Tax

Deduction of the interest claimed u/s 57 against the interest income received by the assessee - interest expenditure incurred on loans appearing in the capital account of proprietary concern against the interest income received on delayed payment of sale consideration of said proprietary concern - AO rejected the contention of the assessee for the two reasons, the interest expenditure claimed was not for the purpose of earning the interest income and secondly, the assessee did not substantiate actual payment or credit by way of TDS details - HELD THAT - The expenditure incurred for realizing interest receipt is only allowed as deduction under the provisions of the Act, therefore, for claiming deduction, the onus was on the assessee to substantiate whether the interest expenditure has been incurred for the purpose of earning the said interest income. In the case interest income has been earned on delayed payment of the sale consideration of the proprietorship concern, whereas the interest expenditure has been incurred on the loans which were taken by the proprietorship concern for its business purchases which later on transferred to the capital account of the assessee. Therefore, the interest expenditure is connected with the proprietorship concern which has been sold. Such interest expenditure is not connected in any manner with the interest which has been earned on the late payment of sale consideration by the purchaser company. The receipt of the sale consideration by the assessee in five years was as per the terms of contract between two parties and such interest income being revenue in nature has been correctly charged under the head income from other sources . But the interest expenditure however being connected with the sale of proprietorship concern, which is liable for tax under the head capital gain and thus the expenditure incurred for investment in the proprietorship concern is related to cost of the said proprietary concern to the assessee. Thus on this ground only the claim of the assessee is not allowable. Further, we find that assessee has failed to substantiate any deduction of the tax at source on such interest credited or actual payment of the interest to the parties. In absence of any documentary evidence to support that interest was either credited in the respective account of those unsecured loans donors or paid by the assessee, the claim of the deduction is also not eligible for allowance in view of lack of the evidences. No infirmity in the order of the Ld. CIT(A) on the issue in dispute and we accordingly uphold the same. All the grounds raised by the assessee are accordingly dismissed.

Summary

Issues Involved:
1. Disallowance of interest claimed u/s 57 of the Income-tax Act.
2. Transfer of unsecured loans from the proprietorship concern to the personal capital account of the assessee.
3. Legitimacy and substantiation of interest payments.

Summary:

Issue 1: Disallowance of interest claimed u/s 57 of the Income-tax Act
The assessee filed returns for AY 2018-19 and 2020-21, declaring interest income and claiming deductions for interest expenses u/s 57. The Assessing Officer disallowed these deductions, and the Ld. CIT(A) upheld the disallowance. The Tribunal noted that the interest income was earned on delayed payment of sale consideration for the transfer of a proprietorship concern, while the interest expenditure was related to loans taken for the business of the said concern. The Tribunal held that the interest expenditure was not incurred for earning the interest income and thus not allowable u/s 57.

Issue 2: Transfer of unsecured loans from the proprietorship concern to the personal capital account of the assessee
The assessee contended that unsecured loans from the proprietorship concern were transferred to his personal capital account before the business was sold to a private limited company. The Tribunal observed that the agreement for the transfer of business included all assets and liabilities, and there was no reason for the unsecured loans to be retained by the assessee. The Tribunal found that the interest expenditure was not connected to the interest income earned on the delayed payment of the sale consideration.

Issue 3: Legitimacy and substantiation of interest payments
The Tribunal noted that the assessee failed to substantiate the actual payment or credit of interest by way of TDS details. The Ld. CIT(A) observed that the interest payments were not truly legitimate and appeared to be a strategy to lower taxable income. The Tribunal upheld this view, stating that the interest expenditure did not meet the criteria for deduction u/s 57, as it was not incurred wholly and exclusively for earning the interest income.

Conclusion:
The Tribunal dismissed the appeals for both assessment years 2018-19 and 2020-21, upholding the disallowance of interest expenditure claimed u/s 57. The order was pronounced in the open Court on 08/05/2024.