2019 (12) TMI 357 - AT - Income Tax

Deduction u/s 57 (iii) - disallowing the assessee s claim of deduction of interest u/s 57(iii) against the interest received by him - HELD THAT - For claiming deduction u/s 57(iii) it would be sufficient to prove that there is nexus between the income earned and amount expended. In view of that matter, all the requirements for claiming deduction u/s 57(iii) are fulfilled and therefore assessee s claim of interest of ₹ 49,38,149/- laid out wholly and exclusively for the purpose of earning interest shown under the head Income from Other Sources can be legally allowed u/s 57(iii) of the Act. CIT has neither verified nor commented to establish nexus between the funds borrowed and advanced for claim of such interest expenses before arriving at such conclusions. The finding of CIT(A) are not supported by corroborative factual evidence in arriving at the conclusion about the intention of the assessee whether his intention was to earn profit or losses and further the department has accepted such a practice adopted by assessee in the past assessment years. The intention to earn interest is disputed by either of the subordinate authorities or adversely commented by the ld. CIT (A) or controverted by the ld. DR and therefore, such interest expenditure, deductible under section 57(iii) can be allowed even if it is not claimed in full by the assessee in the peculiar facts of the case at hand. Considering the factual matrix of the case and legal precedents, we accept the grievance of the assessee justified. Accordingly, we allow the claim u/s 57(iii) of the Act, as legally justified - Decided in favour of assessee.

Issues Involved:
1. Whether the deduction claimed by the assessee under Section 57(iii) of the Income Tax Act for interest expenses is legally allowable.

Issue-wise Detailed Analysis:

1. Deduction under Section 57(iii) of the Income Tax Act:
The sole issue in the appeal is the legal allowability of the deduction claimed by the assessee under Section 57(iii) of the Income Tax Act for interest expenses amounting to ?49,38,149.

Facts of the Case:
The assessee, an individual, declared income from house property as nil, interest and remuneration from a partnership firm amounting to ?2,03,113, and interest income of ?29,45,261 in the return of income. The Assessing Officer (AO) completed the assessment at ?79,42,679, disallowing the deduction claimed under Section 57(iii) for interest expenses.

CIT(A) Observations:
The CIT(A) confirmed the AO's addition, emphasizing that the expenses were not expended wholly and exclusively for the purpose of earning income. The CIT(A) noted that the interest rate on loans given to sister concerns was either equal to or less than the borrowed funds' rate, thus questioning the intention to earn positive income. The CIT(A) also highlighted that the borrowed funds were given to companies where the assessee or family members were major stakeholders, suggesting that the expenses were not solely for earning income.

Appellant's Arguments:
The assessee's counsel reiterated that the assessee had no business income and claimed the deduction proportionately, disallowing excess payments. The counsel argued that the intention to earn income was evident and relied on the Supreme Court decision in Rajendra Prasad Moody, which supports the allowance of such deductions even if not claimed in full.

Respondent's Arguments:
The Department Representative (DR) contended that the loans/funds came from different sources without a clear purpose, and the assessee failed to explain how these were incidental to earning income from other sources.

Tribunal's Findings:
The Tribunal noted that the assessee received loans from third parties and financial institutions and advanced them to related parties at equal or lower interest rates. The CIT(A)'s condition for allowability under Section 57(iii) was that the expenses should be wholly and exclusively for earning income. However, the Tribunal observed that the assessee had provided detailed records of interest paid and received, and had disallowed excess interest payments proportionately.

Legal Precedents:
The Tribunal referred to the Supreme Court judgment in Rajendra Prasad Moody, which clarified that Section 57(iii) does not require actual income to be earned for the expenditure to be deductible. The expenditure must be laid out wholly and exclusively for the purpose of making or earning income, irrespective of whether income is actually earned.

Conclusion:
The Tribunal concluded that the assessee's interest expenses were expended wholly and exclusively for earning income, fulfilling the requirements of Section 57(iii). The Tribunal allowed the deduction of ?49,38,149, overturning the CIT(A)'s decision.

Final Judgment:
The appeal was allowed, and the deduction under Section 57(iii) was deemed legally justified. The order was pronounced in the open court on 04/11/2019.

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