Assessee is Entitled to Claim Deductions of Expenses incurred in relation to Interest Income u/s 57(iii): ITAT [Read Order]

Kolkata bench of Income Tax Appellate Tribunal (ITAT) recently held that an assessee is eligible to claim deductions of expenses incurred in relation to interest income under Section 57(iii) of the Income Tax Act 1961 even if it utilize the same income earned from its main business for earning interest income from his side business.

Assessee in the present case is a partnership firm and engaged in the business of growing and manufacturing tea and also deriving interest income from money lending activity. And the interest income was showed under the head income from other sources. The assessee duly filed its return of income and declared a total income of Rs. 49,69,948 and claimed deduction under section 80IE of the Income Tax Act 1961 on the same amount.

During the course of assessment proceedings the Assessing Officer (AO) observed that the assessee was claiming the deduction under section 80IE of the Act in respect of its tea business, therefore the expense in relation to interest income was claimed against interest income. He was of the view that the assessee has tried to reduce tax burden on its income and accordingly the AO disallowed the interest expenses claimed by the assessee against the interest income.

The bench including Judicial Member S.S.Viswanethra Rav and Accountant Member Waseem Ahmed observed that the surplus fund available with it was advanced for loan to the parties for the purpose of earning interest income. The assessee accordingly claimed interest expense against the interest income. The assessee has also submitted that the surplus fund is representing the capital of the firm which belongs to the partners of the firm. The partners of the firm are being paid interest on the amount of capital contributed by them. Therefore, there was a direct connection between the interest income as well as the interest expenses paid to the partners.

The division bench further stated that while perusing the material facts it was found that the assessee has been paying interest on the capital contributed by the partners to the firm as well as money borrowed by the firm from the outside. The bench further declared that as the interest bearing fund has been advanced by the assessee to the parties to earn interest then in our considered view the interest paid qua to the interest income was very much eligible for deduction under Section 57(iii) of the Income Tax Act.