2020 (12) TMI 68 - AT - Income Tax

Disallowance of interest made u/s.57(iii) - assessee had made borrowings from parties @15% p.a and had invested the same in the partnership firm where assessee is a partner, wherein he earned interest @12% pa - AO sought to disallow the difference in interest rates @3% (15%-12%) u/s.57(iii) under the head income from other sources while completing the assessment - HELD THAT - Certain borrowings were made by the assessee at reduced rate of interest. We find that once the borrowings were accepted as genuine and one to one nexus is found to have been proved that the said borrowings were indeed utilised for investment in a partnership firm wherein assessee was a partner, there cannot be any question of disallowance of interest on the borrowings. As relying on RAJENDRA PRASAD MOODY 1978 (10) TMI 133 - SUPREME COURT we direct the ld. AO to delete the disallowance of interest under the head income from other sources . Disallowance of brokerage on borrowed loan - AO observed that the said expenditure is not incurred for the purpose of earning income under the head income from other sources and accordingly sought to disallow the same - HELD THAT - There is no dispute that the borrowings made by the assessee were utilised for the purpose of investment in partnership firm from where interest has been received by the assessee and taxed under the head income from other sources. Hence, the brokerage paid becomes an expenditure incurred for the purpose of earning interest income in terms of Section 57(iii) and is squarely allowable as deduction. We find that the ld CIT(A) had deleted ₹ 73,392/- and sustained an adhoc disallowance on account of brokerage to the tune of ₹ 1,00,000/-. We direct the ld. AO to allow deduction towards brokerage for the remaining sum of ₹ 1,00,000/-. Addition made on account of annual value of house property in respect of property situated in a small village - HELD THAT - CIT(A) had restricted the addition towards annual value of house property @₹ 20,000/- as against ₹ 30,000/- determined by the ld. AO. We find that both the AO as well as ld. CIT(A) had only estimated the fair rental value of the house property without disputing the submissions made by the assessee before them. At the same time, we find that the rental income stated by the assessee @5,000/- per annum seems to be on the lower side. Hence in order to meet the ends of justice, we direct the ld. AO to determine the fair market value of property @₹ 10,000/- supra and from that statutory deduction of 30% should be given to the assessee and accordingly remaining sum of ₹ 7,000/- should be taxed as income from house property . Accordingly, the ground No.3 raised by the assessee is partly allowed.

Summary

Issues:
1. Disallowance of interest under section 57(iii) of the Income Tax Act.
2. Disallowance of brokerage expenses on borrowed loans.
3. Addition of annual value of house property.

Analysis:

Issue 1: Disallowance of Interest under Section 57(iii)
The appeal addressed disallowance of interest under section 57(iii) of the Income Tax Act amounting to ?2,79,594. The appellant, an individual with business income, claimed deduction for interest and brokerage expenditure against interest income. The appellant borrowed at 15% and invested at 12%, leading to the disallowance by the Assessing Officer (AO) of the difference in interest rates under section 57(iii). The Tribunal ruled in favor of the appellant, citing the purpose of expenditure for earning income as crucial, following the precedent set by the Supreme Court in CIT vs. Rajendra Prasad Moody. The disallowance was directed to be deleted.

Issue 2: Disallowance of Brokerage Expenses on Borrowed Loans
The second issue involved the disallowance of brokerage expenses of ?1,79,932 paid to parties assisting in loan arrangements, which the AO sought to disallow but was restricted by the Commissioner of Income Tax (Appeals) to ?1,00,000. The Tribunal allowed the deduction, emphasizing that the brokerage paid was for the purpose of earning interest income, thus falling under section 57(iii) and being allowable as a deduction. The AO was directed to allow the remaining ?1,00,000 as a deduction for brokerage expenses.

Issue 3: Addition of Annual Value of House Property
The final issue revolved around the addition of the annual value of a house property located in a remote village. The AO estimated the rental income higher than the appellant's submission due to the property's condition, but the Commissioner of Income Tax (Appeals) reduced the addition. The Tribunal, considering the property's unique circumstances, directed the AO to determine the fair market value at ?10,000, allowing a statutory deduction of 30% and taxing the remaining ?7,000 as income from house property. The appellant's appeal was partly allowed on this issue.

In conclusion, the Tribunal partially allowed the appeal, directing the AO to make necessary adjustments in line with the rulings provided for each issue discussed in the judgment.