2017 (12) TMI 531 - AT - Income Tax

Addition on account of interest expense claimed against the interest income - assessee has earned interest income which was offered to tax under the head income from other source - whether the assessee is entitled for claiming the interest expense against the interest income ? - Held that - It is undisputed fact that the loan was provided to the parties on interest and accordingly interest income was earned. Now the question arises whether the fund used by the assessee in providing loan was interest bearing or not. On perusal of the balance-sheet we find that assessee has been paying interest on the capital contributed by the partners to the firm as well as money borrowed by the firm from the outside. As the interest bearing fund has been advanced by the assessee to the parties to earn interest then in our considered view the interest paid qua to the interest income was very much eligible for deduction u/s 57(iii) of the Act. From the above precedent, we hold that assessee is very much entitled to claim the expense incurred in the form of interest against the impugned interest income. Computation of interest expense qua to the interest income - Held that - We find that the assessee has adopted the manner for making the disallowance of interest expense as provided under Rule 8D of I.T. Rules, 1962. Though prima facie we disagreed to the basis adopted by the assessee for claiming the interest expense qua the interest income. However, Ld DR before us has not brought any defect in the manner in which interest expense was worked out against the interest income as adopted by assessee. Therefore, we are not inclined to adjudicate the same. In view of the above, we hold that is entitled to claim the interest expense against the interest income. We respectfully following the consistent view of the Tribunal decline to interfere with the order passed by the Ld. CIT(A) on this account and accordingly the ground taken by the Revenue is regretted.

Summary

Issues involved:
1. Restriction of interest expenditure by CIT(A) against interest income.
2. Claim of interest expenses by the assessee against interest income.
3. Computation of interest expense as per Rule 8D of Income Tax Rules, 1962.

Issue 1: Restriction of interest expenditure by CIT(A) against interest income:
The Revenue appealed against the CIT(A)'s decision to delete the addition of ?36,39,402 made by the AO on account of interest expense claimed against interest income. The Revenue argued that the CIT(A) erred in restricting the interest expenditure without a clear nexus between the expenditure and interest income earned. The AO disallowed the interest expenses, claiming it was a colorable device by the assessee to reduce tax burden. However, the CIT(A) allowed the appeal based on the argument that when common funds are used for different activities and a scientific method is provided for calculation, the working given by the appellant can be justified. The Tribunal upheld the CIT(A)'s decision, stating that the interest expense attributable to lending activities should be reduced to ?36,39,402, as per the appellant's calculations.

Issue 2: Claim of interest expenses by the assessee against interest income:
The assessee, a partnership firm engaged in tea business and money lending, claimed interest expenses against interest income earned from lending activities. The AO contended that there was no direct nexus between interest income and expenses, as the surplus fund was used for both tea business and lending. However, the CIT(A) accepted the assessee's argument that the interest-bearing funds were used to provide loans, justifying the claim of interest expense against interest income. The Tribunal agreed with the CIT(A), allowing the deduction of interest expenses against the interest income under section 57(iii) of the Income Tax Act.

Issue 3: Computation of interest expense as per Rule 8D of Income Tax Rules, 1962:
The assessee computed interest expenses following Rule 8D of the Income Tax Rules, 1962, claiming a direct nexus between interest income and expenses. The AO raised objections to the computation method, stating it was incorrect and not applicable to dividend income. However, the Tribunal found no defects in the calculation method adopted by the assessee and upheld the claim for interest expenses against interest income. The Tribunal declined to interfere with the CIT(A)'s decision, emphasizing the entitlement of the assessee to claim interest expenses.

In conclusion, the Tribunal dismissed the Revenue's appeals for both assessment years, upholding the assessee's right to claim interest expenses against interest income based on the direct nexus between the funds used for lending activities and the interest income earned. The Tribunal also supported the computation of interest expenses as per Rule 8D, finding no grounds for interference with the CIT(A)'s decision.