2018 (12) TMI 1051 - AT - Income Tax

Allowability of the interest expenditure as a deduction u/s 57(iii) against interest income on FDRs - assessee for not opting for a premature encashment of the FDR s and rather raising a loan from the bank to facilitate purchase of residential property, was backed with the intent of protecting the interest income received from the fixed deposits - Held that - In case of interest income earned by an assessee, only the expenditure (not being in the nature of a capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is to be allowed as a deduction under Sec. 57(iii) of the Act. We thus, are of the considered view that as the interest expenditure of ₹ 37,84,593/- incurred by the assessee on the loan raised for purchase of property (against the security of FDR s), cannot be construed as having been laid out or expended wholly and exclusively for the purpose of making or earning of the interest income on the said FDR s, therefore, the same cannot be allowed as a deduction as against the interest income of the assessee - the existence of an inextricable nexus between the incurring of the interest expenditure and earning of the interest income is a pre-requisite condition for allowability of the interest expenditure as a deduction under Sec. 57(iii) of the Act. We find that our aforesaid view stands fortified by the judgment of the Hon ble Supreme Court in the case of CIT Vs. Dr. V.P Gopinathan 2001 (2) TMI 10 - SUPREME COURT - decided against assessee. Alternative claim of the assessee - as the interest expenditure was incurred on the funds borrowed for acquisition of a property, thus, the same would be entitled for deduction under Sec. 24(b) - Held that - the interest expenditure incurred by the assessee on the loan raised by him, to the extent the same is relatable to the funds utilized by him towards purchase of his share of ownership in the residential property viz. Flat No. 201, Sea Goddess, Juhu, Mumbai, would be eligible for deduction under Sec. 24(b) of the Act. We thus, restore the matter to the file of the A.O, who shall after making necessary verifications allow the deduction of the interest expenditure under Sec. 24(b) of the Act to the assessee - decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of deduction of interest expenditure under Sec. 57(iii) of the Income-tax Act, 1961.
2. Rejection of claim for deduction under Sec. 24(b) of the Act.

Analysis:

1. The appeal was against the order passed by the CIT(A)-58, Mumbai, arising from the A.O's order under Sec. 143(3) for Assessment Year 2013-14. The A.O observed interest income discrepancies and disallowed a deduction of &8377; 37,84,593/- claimed by the assessee. The CIT(A) upheld the disallowance based on legal precedents. The Tribunal, after considering arguments from both parties, upheld the disallowance under Sec. 57(iii) as the interest expenditure was not wholly and exclusively incurred for earning interest income, citing relevant legal judgments. The Tribunal dismissed Ground of appeal No. 1.

2. The assessee's alternative claim for deduction under Sec. 24(b) was rejected by lower authorities due to lack of supporting documentation. However, the Tribunal noted that the claim was indirectly raised under Sec. 57(iii) and allowed the assessee to seek deduction under Sec. 24(b). Citing legal precedents, the Tribunal emphasized the assessee's right to raise additional claims during appeal. The Tribunal held that the interest expenditure related to the residential property acquisition was eligible for deduction under Sec. 24(b) and directed the matter back to the A.O for verification. The Tribunal allowed Ground of appeal No. 2.

In conclusion, the appeal was partly allowed, with the Tribunal upholding the disallowance under Sec. 57(iii) but allowing the deduction under Sec. 24(b) for the interest expenditure related to the residential property acquisition.