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2025 (4) TMI 1435 - AT - Income TaxIncome from other sources - deduction of interest expenditure u/s 57(iii) against the interest income earned under the head Income from Other Sources - Assessee had earned interest income from loans and advances and had simultaneously claimed interest expenses u/s 57(iii) - assessee had failed to establish a clear nexus in respect of the interest-bearing borrowings and the corresponding advances before the lower authorities HELD THAT - In the present case the nexus at least indirect if not direct between the interest-bearing borrowings and the interest-earning advances is sufficiently established by the assessee by furnishing cogent documentary evidence. AO and the CIT(A) have disregarded the evidence placed on record without pointing out any specific defect therein. Disallowance cannot be sustained on mere conjecture or suspicion without any tangible adverse material. AR has brought to our attention that in the subsequent Assessment Year 2018 19 the assessee had claimed deduction of similar interest expenditure against interest income earned on loans and advances and the same was allowed by the CIT(A). As there is no change in facts or law and a particular view has been taken in the assessee s own case for a different year consistency demands that the same view should ordinarily be followed unless there is a distinguishing feature brought on record. We are of the considered opinion that the assessee is entitled to claim deduction u/s 57(iii) and the disallowance made by the AO and confirmed by the CIT(A) is not sustainable in law. Accordingly the disallowance is directed to be deleted.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Entitlement to Deduction of Interest Expenditure under Section 57(iii) of the Act Relevant Legal Framework and Precedents: Section 57(iii) of the Income Tax Act, 1961 allows deduction of interest expenditure incurred wholly and exclusively for the purpose of making or earning income under the head "Income from Other Sources." The legal test is the purpose of the expenditure, not necessarily that the expenditure must result in earning income. The expenditure should be incurred "wholly and exclusively" for earning such income. Court's Interpretation and Reasoning: The Court emphasized that the assessee had borrowed funds on which interest was paid and had earned interest income by advancing funds to third parties. The Assessing Officer did not dispute the genuineness of borrowings or advances but questioned the nexus between them. The Court found that the assessee had established the purpose of the borrowings and the corresponding advances to earn interest income, satisfying the requirement of section 57(iii). Key Evidence and Findings: The assessee furnished detailed statements showing the flow of funds from borrowings to advances, ledger accounts, bank statements, and computations of income. The borrowings were from parties such as White Valley Pvt. Ltd., Tulsi Industries, and Tulsi Dyechem Pvt. Ltd., and the advances were made to related parties on which interest income was earned and declared. The assessee also segregated interest expenditure related to personal or capital purposes and did not claim those portions under section 57(iii). Application of Law to Facts: Applying the statutory test, the Court held that the interest expenditure was incurred wholly and exclusively for earning taxable interest income. The detailed documentary evidence established the nexus between borrowed funds and interest-earning advances, fulfilling the statutory requirement. Treatment of Competing Arguments: The Assessing Officer and CIT(A) disallowed the deduction on the ground of absence of direct nexus. The Departmental Representative contended the true purpose of borrowing was not established. However, the Court found no adverse material or evidence disproving the assessee's explanation and held that mere suspicion or conjecture cannot sustain disallowance. Conclusions: The assessee is entitled to claim deduction of Rs. 39,60,528/- under section 57(iii) of the Act as the nexus between interest-bearing borrowings and interest-earning advances is sufficiently established. Issue 2: Establishment of Nexus between Borrowed Funds and Interest-Earning Advances Relevant Legal Framework and Precedents: The principle requires that the expenditure claimed as deduction must be incurred for the purpose of earning income. Establishing a nexus between borrowed funds and income-earning assets is crucial for allowing interest deduction under section 57(iii). Court's Interpretation and Reasoning: The Court observed that the assessee had initially borrowed funds with an intention to commence business, but since business activities did not commence, the funds were advanced to earn interest income. The Court accepted the assessee's explanation and found the detailed statements, bank transactions, and ledger accounts corroborated the flow of funds and nexus. Key Evidence and Findings: The Court examined the detailed statement showing dates and amounts of borrowings and corresponding advances, supported by bank statements and ledger accounts. The evidence demonstrated a one-to-one correspondence between borrowed funds and advances made. Application of Law to Facts: The Court held that the nexus, even if indirect, is sufficient to meet the statutory requirement. The absence of direct tracing of each rupee was not fatal where the overall flow and purpose were satisfactorily demonstrated. Treatment of Competing Arguments: The Departmental Representative questioned the true purpose of borrowing and lending. However, the Court found no material to discredit the assessee's explanation or evidence and rejected the Department's argument as speculative. Conclusions: The nexus between borrowed funds and interest-earning advances is sufficiently established, entitling the assessee to claim the interest expenditure deduction. Issue 3: Consideration of Submissions and Evidence by Lower Authorities Relevant Legal Framework: The principles of natural justice and fair adjudication require that all relevant evidence and submissions be duly considered by the assessing authorities. Court's Interpretation and Reasoning: The Court noted that the Assessing Officer and CIT(A) failed to properly appreciate the detailed documentary evidence placed on record by the assessee. The lower authorities did not point out any specific defect or infirmity in the evidence but disallowed the deduction on conjecture. Key Evidence and Findings: The paper book containing replies, bank statements, ledger accounts, and detailed flow of funds was before the authorities but disregarded without reasoned analysis. Application of Law to Facts: The Court held that disallowance cannot be sustained on mere suspicion without tangible adverse material and that the authorities erred in ignoring the cogent evidence. Treatment of Competing Arguments: The Departmental Representative relied on the orders below without bringing fresh material. The Court found this insufficient to uphold disallowance. Conclusions: The lower authorities failed to consider the assessee's submissions and evidence adequately, leading to erroneous disallowance. Issue 4: Application of Principle of Consistency Relevant Legal Framework: It is a well-settled legal principle that in the absence of any change in facts or law, a consistent view should be taken in the assessee's case across different assessment years. Court's Interpretation and Reasoning: The Court noted that in the subsequent Assessment Year 2018-19, the assessee claimed similar interest expenditure against interest income, which was allowed by the CIT(A). The facts and circumstances were identical, and no distinguishing features were brought on record. Key Evidence and Findings: The order of CIT(A) for AY 2018-19 allowing the deduction was placed on record and considered persuasive. Application of Law to Facts: The Court held that consistency demands the same treatment for the present year unless material changes exist, which were absent. Treatment of Competing Arguments: The Department did not produce any material distinguishing the two years or justifying departure from the earlier decision. Conclusions: The principle of consistency supports the assessee's claim for deduction in the present year. 3. SIGNIFICANT HOLDINGS The Court held:
Core principles established include the necessity of establishing the purpose of expenditure for claiming deduction under section 57(iii), the sufficiency of indirect nexus between borrowed funds and interest-earning advances, the inadmissibility of disallowance based on suspicion without evidence, and the application of consistency in tax treatment across assessment years. The final determination was that the assessee is entitled to deduction of Rs. 39,60,528/- under section 57(iii) of the Income Tax Act, 1961, and the disallowance by the Assessing Officer and CIT(A) is quashed. The appeal is allowed accordingly.
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