2024 (7) TMI 35 - AT - Income Tax

Income From other sources - Disallowance of interest expenses u/s 57(iii) - interest paid to depositors or to banks was incurred for the purpose of earning interest income on FDR and interest on saving bank account - Claim denied in absence of any direct nexus between the Income from Other Sources and interest expenditure - assessee submitted that the amount which was borrowed has been invested in the firms in which the assessee is a partner from whom the assessee earned interest income and the borrowed amount was also invested in immoveable properties. HELD THAT - On a bare perusal of section 57(iii) of the Act it is evident that for claiming under this section such expenditure has to be incurred wholly and exclusively for earning such income. In this case it is apparent that there is no nexus between incurring of interest expenditure and Income from Other Sources earned by the assessee which are mainly from interest on fixed deposits and interest on saving bank accounts and therefore clearly in absence of any correlation between incurring of expenditure and earning of interest income in our view CIT(A) has correctly held that such interest expenditure cannot be allowed in the hands of the assessee since for such expenditure to be allowed as a deduction the same has to be incurred wholly and exclusively for earning such income. However as is evident from the facts of the case before us since no part of the interest expenditure has been incurred wholly and exclusively for earning such income the same cannot be allowed as an expenditure u/s. 57(iii) of the Act - Appeal of the assessee is dismissed.

Summary

Issues:
Appeal against addition of interest expenses in income tax assessment for A.Y. 2009-10.

Analysis:
The appeal before the Appellate Tribunal ITAT Rajkot arose from the order of the CIT(A)-III, Rajkot for A.Y. 2009-10 under the Income Tax Act, 1961. The assessee challenged the addition of Rs. 10,87,419/- by the Assessing Officer, claiming it should be deleted. The delay in filing the appeal was condoned due to the assessee's health issues and caregiving responsibilities. The Assessing Officer disallowed the interest expenses as there was no direct nexus between the interest expenditure and income from other sources. The CIT(A) confirmed the disallowance, stating the onus was not discharged by the assessee to prove the claim of interest paid. The Tribunal upheld the decision, emphasizing the requirement of expenditure to be incurred "wholly and exclusively" for earning such income under Section 57(iii) of the Act.

The Assessing Officer observed that the income of the assessee mainly comprised profits from firms, which were exempt. Therefore, disallowing the interest payment against the exempt income was justified. The assessee argued that the disallowance was erroneous as the income was taxable and not exempt, citing interest and remuneration earned from partnership firms. The Tribunal noted that the interest expenditure did not have a direct correlation with the interest income earned, leading to the dismissal of the appeal.

The Tribunal referenced Section 57(iii) of the Act, highlighting the requirement for expenditure to be incurred "wholly and exclusively" for earning the income. Since there was no clear connection between the interest expenditure and the income from other sources, the disallowance of the interest expenses was upheld. The Tribunal concluded by dismissing the appeal, affirming the decision of the CIT(A) regarding the disallowance of Rs. 10,87,419/- in the assessment for A.Y. 2009-10.