2019 (10) TMI 636 - AT - Income Tax

Disallowance of interest expenditure u/s 36(1)(iii) - interest expenditure allowable as a deduction u/s 57(iii) - HELD THAT - Since the assessee intended to purchase a business premise from the funds borrowed, it can be very well concluded that the purpose for which these loans were obtained were business purpose only. It is noted that assessee could not find any suitable office, he invested these idle funds into FDRs to reduce the burden of interest cost to be borne on the borrowed funds and the funds are readily available to the assessee as when a suitable office is found for investment. It is a well settled law that revenue cannot sit in the armchair of a businessman to decide the reasonableness of a decision taken by a businessman. Here, in this case also, the AO has alleged that the borrowed funds were not for a business purpose while the assessee has clearly established the nexus between the purpose of business and the expenditure incurred. AO has wrongly disallowed the expenditure claimed by the assessee u/s 36(1)(iii) of the Act, by alleging that the interest expenditure were not directly related to the business of the assessee. Even otherwise, if the said expenditure is not allowable as a business expenditure, then the interest expenditure is allowable as a deduction u/s 57(iii) . During the year under consideration, the assessee had earned interest on FDR amounting to ₹ 13,41,303/- and a total expenditure on interest on loan and bank interest amounting to ₹ 14,90,125/- As per the language of section 57(iii) the expenditure which is wholly and exclusively incurred for the purpose of earning income chargeable under the head income from other sources, is allowed as deduction from the said income of the assessee. Thus, it can be concluded that there is a direct nexus between the income earned and the expenditure incurred which should allowable as a deduction u/s 57(iii) - Appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance of expenditure under section 36(1)(iii) of the Income Tax Act.
2. Rejection of deduction under section 57(iii) of the Income Tax Act.

Issue 1: Disallowance of expenditure under section 36(1)(iii) of the Income Tax Act:
The appellant challenged the disallowance of expenditure by the Assessing Officer (AO) on the grounds that the expenses were incurred solely for business purposes. The AO alleged that the interest expenses did not have a direct connection with the appellant's profession, despite the appellant's claim that the loans were obtained for business purposes. The AO further contended that since the loan amount was invested in Fixed Deposit Receipts (FDRs) and interest was earned on this investment, the loan was not utilized for the intended business purpose. The appellant argued that the borrowed funds were intended for expanding the business by purchasing a larger office premise. The appellant cited a declaration from a broker indicating the continuous search for a suitable office premise. The appellant also emphasized that the timing of investment of borrowed funds was at their discretion as long as it was for business purposes. The Tribunal found merit in the appellant's arguments, referencing a Karnataka High Court decision that clarified the purpose of borrowing for business or profession. The Tribunal concluded that the loans were obtained for business purposes, even though the funds were temporarily invested in FDRs due to the unavailability of a suitable office premise. The Tribunal held that the AO's disallowance was unwarranted, highlighting that the revenue cannot question a businessman's decision-making regarding business expenses.

Issue 2: Rejection of deduction under section 57(iii) of the Income Tax Act:
The appellant contended that if the expenditure was not allowable as a business expense, it should be considered for deduction under section 57(iii) of the Income Tax Act. The appellant had earned interest on FDRs during the year, and the total expenditure on interest and bank charges exceeded this income. Section 57(iii) allows deductions for expenses wholly and exclusively incurred for earning income under the head "income from other sources." The Tribunal noted a direct nexus between the income earned and the expenses incurred, making them eligible for deduction under section 57(iii). By considering the facts and precedents, the Tribunal concluded that the AO's disallowance was unjustified. The Tribunal ruled in favor of the appellant, deleting the addition made by the AO and upheld by the Commissioner of Income Tax (Appeals).

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the legitimate business purpose behind the expenditure and the eligibility for deduction under the relevant sections of the Income Tax Act.