2025 (1) TMI 386 - AT - Income Tax

Addition of interest - interest expenditure claimed by the assessee u/s 57(iii) - no business exigency for which the loan was given at a lower rate of 5.22% which was availed by the assessee at a rate of 9.04%, accordingly, the AO restricted the interest expenditure to a rate of 5.22% - HELD THAT - Revenue has emphasized on the aspect of business prudence in advancing the loans to the sister concern at lower rates than the rate at which the funds were borrowed by the assessee. In this regard, it is pertinent to note that it is trite law that the test of commercial expediency/business prudence is required to be judged from the point of view of the businessman and not the Revenue. Therefore, we do not find any basis for restricting the interest expenditure claimed by the assessee under section 57(iii) of the Act. The loan availed by the assessee on interest was used to lend funds to the sister concern on interest and the interest expenditure incurred was claimed as a deduction under section 57(iii) of the Act. We are considered opinion that the assessee is entitled to claim a deduction under section 57(iii) of the Act in respect of interest expenditure while computing the income under the head income from other sources . Accordingly, the impugned disallowance made by the AO and upheld by the learned CIT(A) is deleted. Appeal of the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the interest expenditure claimed by the assessee under Section 57(iii) of the Income Tax Act, 1961, is allowable as a deduction.
Whether the Assessing Officer (AO) was justified in restricting the interest expenditure to the average rate at which interest was earned by the assessee.
Whether the loans given by the assessee to family members or related firms at a lower interest rate than the rate at which funds were borrowed can be considered as lacking business prudence or expediency.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of Interest Expenditure under Section 57(iii)

Relevant Legal Framework and Precedents: Section 57(iii) of the Income Tax Act allows deductions for any expenditure not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head "income from other sources".
Court's Interpretation and Reasoning: The court emphasized that the test of commercial expediency should be judged from the perspective of the businessman, not the Revenue. The court noted that no evidence was provided by the Revenue to suggest that the funds were used for purposes other than lending to family members or related firms.
Key Evidence and Findings: The assessee borrowed funds at an interest rate of 9.04% and lent them at 5.22%. There was no evidence that the loans were used for purposes other than those claimed by the assessee.
Application of Law to Facts: The court found that the interest expenditure was incurred wholly and exclusively for earning interest income, thus meeting the requirements of Section 57(iii).
Treatment of Competing Arguments: The Revenue argued that there was no business exigency for lending at a lower rate. The court rejected this argument, highlighting that commercial expediency should be viewed from the assessee's perspective.
Conclusions: The court concluded that the interest expenditure claimed by the assessee is allowable as a deduction under Section 57(iii).

Issue 2: Restriction of Interest Expenditure

Relevant Legal Framework and Precedents: The AO restricted the interest expenditure to the average rate of interest earned by the assessee, arguing that this reflects the actual business practice.
Court's Interpretation and Reasoning: The court found no basis for the AO's restriction, as the expenditure was incurred for earning income from other sources, and the commercial decisions of the assessee should not be second-guessed by the Revenue.
Key Evidence and Findings: The court noted the lack of evidence from the Revenue to justify the restriction of interest expenditure.
Application of Law to Facts: The court applied the principles of Section 57(iii) and found that the restriction imposed by the AO was unjustified.
Treatment of Competing Arguments: The Revenue's reliance on various precedents was found to be misplaced, as the facts of those cases were distinguishable from the present case.
Conclusions: The court held that the restriction of interest expenditure by the AO was unwarranted and deleted the disallowance.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The test of commercial expediency/business prudence is required to be judged from the point of view of the businessman and not the Revenue."
Core Principles Established: The principle that the commercial decisions of a taxpayer should not be second-guessed by the Revenue, and that deductions under Section 57(iii) should be allowed if the expenditure is incurred wholly and exclusively for earning income from other sources.
Final Determinations on Each Issue: The court allowed the deduction of interest expenditure under Section 57(iii) and deleted the disallowance made by the AO, thus granting relief to the assessee.

In conclusion, the court allowed the appeal of the assessee, emphasizing the importance of assessing commercial expediency from the taxpayer's perspective and finding no justification for the Revenue's actions in restricting the interest expenditure. The judgment reinforces the application of Section 57(iii) in allowing deductions for expenditures incurred to earn income from other sources.

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