2022 (3) TMI 827 - AT - Income Tax

Addition towards interest expenses - borrowing money from related party (partnership firm) at higher rate of interest and lending the same at lower interest rate - CIT(A) upheld the additions restricting the interest expense only to the extent of income earned u/s 57 - HELD THAT - Assessee is claiming interest paid as deduction from interest received on the ground that interest expenses were incurred wholly and exclusively for the purpose of earning interest income. We fail to understand this transaction of the assessee. The assessee is a practicing Chartered Accountant and is not engage in money laundering business. There is no dispute that the assessee has borrowed the money from his firm for the purposes of his profession. The assessee in his wisdom borrowed money at a higher rate of interest and lended the same at a lower rate of interest. AO should have disallowed the entire interest claimed by the assessee but we cannot improve the assessment order nor I can improve the order of the CIT(A). In my considered opinion borrowing money at a higher rate of interest from a related party and lending the same at lower rate of interest to an unrelated party defies all commercial prudence expected from a Chartered Accountant. Surrounding circumstances cannot be ignored. Appeal filed by the assessee is dismissed.

Summary

Issues:
1. Whether the interest expense claimed by the assessee should be restricted to the extent of income earned under section 57 of the Act.
2. Whether the deduction claimed by the assessee under section 57(iii) for interest expenses is valid.

Analysis:
Issue 1: The primary grievance of the assessee was regarding the addition of a specific amount by restricting the interest expense to the income earned under section 57 of the Act. The assessee, a Chartered Accountant, had borrowed a significant amount from a partnership firm and extended a loan to another entity. The Assessing Officer (AO) questioned the interest paid by the assessee on the borrowed funds compared to the interest received from the loan given by the assessee. The AO added a certain amount to the assessee's income, which was contested before the CIT(A).

Issue 2: The CIT(A) analyzed the facts and contentions presented by the assessee. It was observed that the deduction under section 57(iii) should be based on expenses laid out wholly and exclusively for making or earning the particular income. The CIT(A) noted that the deduction claimed by the assessee should have been restricted to the interest income from borrowed funds only, rather than the entire interest paid by the assessee. The CIT(A) provided a detailed breakdown of the interest income received and the interest paid, concluding that the AO's action of disallowing a specific amount was fair and reasonable.

Judgment: The appellate tribunal, after considering the arguments presented by both parties and the orders of the lower authorities, upheld the decision of the CIT(A). The tribunal highlighted the unusual nature of the transaction where the assessee borrowed at a higher rate of interest and lent at a lower rate, expressing concern over the commercial prudence of such actions by a Chartered Accountant. Despite acknowledging the AO's potential for disallowing the entire interest claimed, the tribunal declined to interfere with the findings of the CIT(A) based on the totality of the case. Consequently, the appeal filed by the assessee was dismissed, affirming the disallowance of the specific amount in question.