2025 (3) TMI 931 - AT - Income Tax

Interest expenses claimed u/s 57(iii) - whether there was no co-relation between interest earned and interest paid as required u/s 57 ? - HELD THAT - Since the assessee in the instant case has proved the nexus of amount borrowed on which interest has been paid and the amount lent on which interest has been earned and since the AO in the subsequent year has allowed the claim of such deduction u/s 57 on account of same loans and advances after scrutiny therefore we are of the considered opinion that the Ld. CIT(A) / NFAC was not justified in sustaining the disallowance of interest expenditure claimed by the assessee u/s 57. We accordingly set aside the order of the Ld. CIT(A) / NFAC and allow the grounds raised by the assessee.

ISSUES PRESENTED and CONSIDERED

The core legal issue in this case was whether the assessee was entitled to claim a deduction under Section 57(iii) of the Income Tax Act, 1961, for interest expenses incurred, which were claimed to be wholly and exclusively for the purpose of earning interest income. Specifically, the Tribunal needed to determine whether there was a direct nexus between the interest paid and the interest earned, as required by the statute.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

Section 57(iii) of the Income Tax Act allows for deductions of expenses incurred wholly and exclusively for the purpose of making or earning income from other sources. The legal question revolves around the interpretation of "wholly and exclusively" and the necessity of a direct nexus between the income earned and the expenses incurred.

Court's interpretation and reasoning:

The Tribunal examined whether the assessee had demonstrated a direct nexus between the borrowed funds on which interest was paid and the funds lent out to earn interest income. The Tribunal considered the history of transactions and the treatment of similar claims in previous and subsequent assessment years.

Key evidence and findings:

The assessee provided a detailed chart showing the amounts received from Vikas Deep Sales Pvt. Ltd. and the amounts subsequently advanced to Shubham Vipra Associates and Shubham Housing Developers Pvt. Ltd. The Tribunal noted that the amounts borrowed and lent were closely aligned in terms of timing and amount, suggesting a direct nexus.

Additionally, the Tribunal considered the assessment order for the subsequent year (2018-19), where a similar deduction under Section 57 was allowed after scrutiny by the Assessing Officer.

Application of law to facts:

The Tribunal applied the principles of Section 57(iii) to the facts, emphasizing the need for a direct nexus between the interest paid and the interest earned. The evidence provided by the assessee, including the timing and amounts of transactions, supported the claim that the borrowed funds were used to earn taxable interest income.

Treatment of competing arguments:

The Department argued that there was no direct correlation between the interest paid and the interest earned, as required by Section 57. The Tribunal, however, found that the assessee had sufficiently demonstrated the nexus, especially considering the consistency in treatment across assessment years.

Conclusions:

The Tribunal concluded that the assessee had established the necessary nexus between the interest expenses and the interest income, thereby justifying the deduction under Section 57(iii). The Tribunal set aside the order of the CIT(A) / NFAC, allowing the appeal filed by the assessee.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The Tribunal held that "since the assessee in the instant case has proved the nexus of amount borrowed on which interest has been paid and the amount lent on which interest has been earned... therefore, we are of the considered opinion that the Ld. CIT(A) / NFAC was not justified in sustaining the disallowance of interest expenditure claimed by the assessee u/s 57 of the Act."

Core principles established:

The judgment reinforces the principle that for a deduction under Section 57(iii), there must be a clear and direct nexus between the expenditure incurred and the income earned. The consistency of treatment in similar cases across different assessment years can be a relevant consideration.

Final determinations on each issue:

The Tribunal determined that the assessee was entitled to the deduction claimed under Section 57(iii) for the interest expenses, as the requisite nexus was established. The appeal was allowed, and the disallowance by the CIT(A) / NFAC was overturned.

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