2024 (12) TMI 1085 - AT - Income Tax

Deduction u/s. 57 - Disallowance of interest expenses claimed u/s 57 - nexus between loans taken and loans advanced for earning interest income - HELD THAT - Nexus of the loan amounts from SBH and PNB, which was initially advanced to Nandan Corporation and subsequently transferred from Nandan Corporation to Tripoli Management, is established to the extent of Rs. 5 crore advanced on 20/06/2016.Since the assessee had offered the interest derived from Tripoli Management to tax, it is entitled to claim deduction in respect of interest payment on loan amount of Rs. 5 crores for the period from 20/06/2016 to 31/03/2017. The assessee has submitted the working of interest on this loan of Rs. 5 crores for the period from 20/06/2016 to 31/03/2017 which works out to Rs. 36,58,096/-. We deem it proper to set aside the matter to the file of Jurisdictional AO with a direction to verify the working of interest on loan ofRs. 5 crores for the period from 20/06/2016 to 31/03/2017 and thereafter allow the deduction to the assessee. In case of any variation in the amount of interest, than the amount as worked out by the assessee, the AO should allow an opportunity of being heard to the assessee. The finding of the CIT(A) in respect of LIC policy loan has not been controverted by the assessee. This loan was advanced to Nandan Corporation and we have already considered the transfer of a sum of Rs. 5 crore from Nandan Corporation to Tripoli Management and given our finding and direction in this regard earlier. The claim for separate deduction in respect of interest on LIC policy loan cannot be entertained. The disallowance of interest claim on LIC policy loan, as confirmed by Ld. CIT(A), is upheld. Appeal of the assessee is partly allowed for statistical purpose.

Issues Involved:

1. Disallowance of interest expenses claimed under Section 57 of the Income Tax Act.
2. Establishment of nexus between loans taken and loans advanced for earning interest income.
3. Deduction of interest payments related to specific loans from various banks.

Detailed Analysis:

Issue 1: Disallowance of Interest Expenses Claimed Under Section 57

The primary issue in this case revolves around the disallowance of interest expenses claimed by the assessee under Section 57 of the Income Tax Act. The assessee had claimed a deduction of Rs. 1,33,68,138/- against interest income of the same amount. The Assessing Officer (AO) disallowed the entire claim, contending that the loans on which interest was incurred were not wholly and exclusively for the purpose of earning interest income. The Commissioner of Income Tax (Appeals) [CIT(A)] provided partial relief by restricting the disallowance to Rs. 52,36,850/-. The Tribunal examined whether the interest expenditure was laid out wholly and exclusively for earning interest income, which is a requirement under Section 57 of the Act.

Issue 2: Establishment of Nexus Between Loans Taken and Loans Advanced

A critical aspect of the case was establishing the nexus between the loans taken by the assessee and the loans advanced to Tripoli Management Pvt. Ltd., from which interest income was derived. The assessee argued that loans from State Bank of India (SBI), State Bank of Hyderabad (SBH), and Punjab National Bank (PNB) were used to advance funds to Tripoli Management Pvt. Ltd., thereby establishing a direct connection. The CIT(A) allowed the deduction for interest paid on the SBI loan, finding a clear nexus, but disallowed interest related to SBH and PNB, citing a lack of direct linkage. The Tribunal agreed with the CIT(A) on the SBI loan but found that the nexus for the SBH and PNB loans was established through subsequent transactions, warranting a reassessment by the AO.

Issue 3: Deduction of Interest Payments Related to Specific Loans

The Tribunal evaluated the deduction of interest payments concerning specific loans from different banks:

- SBI Loan: The CIT(A) allowed the deduction of Rs. 76,98,249/- paid to SBI, as the loan was directly advanced to Tripoli Management Pvt. Ltd. on the same day it was taken, establishing a clear nexus.

- HDFC Bank Loan: The deduction of Rs. 4,33,039/- was also allowed, as the loan was ultimately used for earning interest income from Tripoli Management Pvt. Ltd.

- SBH and PNB Loans: Initially disallowed by the CIT(A), the Tribunal found that the amount received from Nandan Corporation LLP was used to advance funds to Tripoli Management Pvt. Ltd., thus establishing the required nexus. The Tribunal directed the AO to verify the interest calculation for the period from 20/06/2016 to 31/03/2017 and allow the deduction accordingly.

- LIC Policy Loan: The deduction of Rs. 17,30,100/- related to the LIC policy loan was disallowed, as it was advanced to Nandan Corporation LLP, and the income from this was exempt.

For the assessment year 2018-19, the Tribunal applied the same rationale as for 2017-18, particularly concerning the PNB loan. The Tribunal directed the AO to verify the interest calculation for the period from 01/04/2017 to 31/03/2018 and allow the deduction for the PNB loan.

Conclusion:

The Tribunal partly allowed the appeal for the assessment year 2017-18 and allowed the appeal for 2018-19 for statistical purposes. The Tribunal directed the AO to reassess the interest deductions based on the established nexus between the loans taken and advanced, ensuring that deductions are allowed where applicable.

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