2017 (6) TMI 979 - AT - Income Tax

Disallowance of interest on restricting the interest expense to the extent of interest income - Held that - We find that the Tribunal has decided this issue by considering the various judgments including the decision of Hon ble Apex Court in the case of CIT vs. Rajendra Prasad Modi 1978 (10) TMI 133 - SUPREME Court whereby has verified and worked out the capital expenditure of the assessee and calculated interest bearing funds and non-interest bearing fund. We, respectfully following the same, are of the view that the assessee is entitled for part relief.

Summary

Issues:
Disallowance of interest expenses on restricting to the extent of interest income.

Analysis:
The appellant filed an appeal against the order of Ld. CIT(A)-12 Mumbai for the Asst. year 2008-09 regarding the disallowance of interest expenses. The appellant had received interest income of ?31,47,423 and claimed interest expenses of ?80,37,071. The appellant argued that the interest income was directly related to the business activities, and hence, should be taxed under Business & Profession instead of Income from other sources. However, the Ld. CIT(A) dismissed the appeal. During the hearing, the Ld. AR contended that the interest expenses should be allowed as business expenditure, as the Tribunal had granted relief in a similar case. On the contrary, the Ld. DR argued that the appellant did not provide evidence of money lending business and had only shown interest income without any other business income. The Ld. DR cited a decision of the Hon'ble Madras High Court to support the argument that not all income received by a person carrying on business is business income.

The Tribunal considered various judgments, including the decision of the Hon'ble Apex Court in the case of CIT vs. Rajendra Prasad Modi, and calculated the interest disallowance based on the capital structure of the company. The Tribunal referred to Section 57 of the Income Tax Act, which allows deductions for expenditures laid out wholly and exclusively for earning income from other sources. The Tribunal concluded that legitimate expenditures incurred for the purpose of earning income are allowable, irrespective of the actual income earned. Based on the calculations, the Tribunal partly allowed the appeal of the assessee, following a similar decision of a co-ordinate Bench.

Therefore, the Tribunal partially allowed the appeal of the assessee regarding the disallowance of interest expenses, considering the legitimate expenditures incurred for earning income and the capital structure of the company.