Disallowance u/s 57(ii) of Income Tax Act allowable on Expenses Incurred wholly for earning Income from Other Sources: ITAT [Read Order]

The Ahmedabad bench of Income Tax Appellate Tribunal (ITAT) has held that disallowance under section 57(ii) of the Income Tax Act, 1961 is allowable on expenses incurred wholly for earning Income From Other Sources. In the absence of the assessee's explanation, there was no nexus between the interest-bearing funds and their utilization for making advances for earning interest income.

Shri Girishbhai Vadilal Shah, the assessee had shown interest income of Rs.1,08,39,837/- under the head “income from other sources” and claimed expenses against the same of Rs.1,08,52,717/-. Thus, the assessee has returned the loss of Rs.12,880/- under the head “income from other sources”.

Out of this claim of Rs.1.08 crores of interest expenses the Assessing Officer disallowed expenses to the tune of Rs.54,32,948/- which were about loans taken by the assessee on which the rate of interest paid was found to be more than the rate at which the loans were advanced. The Assessing Officer noted that while the assessee had charged interest @12%, the same had been advanced by charging a lower rate of interest, i.e. ranging from 6% to 10% and the difference accordingly was worked out and was disallowed in terms of section 57(iii) of the Act.

It was found that the only requirement to be fulfilled for claiming expenses under section 57(iii) is that they must have been incurred wholly and exclusively to earn income from other sources.

The two-member Bench of Annapurna Gupta (Accountant Member) and Madhumita Roy (Judicial Member) observed that what section 57(iii) requires is that expenses must have been incurred to earn income to be eligible to claim the same against the said income.

It was evident that the assessee has earned an interest income of Rs.1,08,39,837/-. Therefore, the Assessing Officer's finding that there is no income is factually incorrect and this basis of the Assessing Officer is, therefore, for denying the assessee's claim of expenditure under section 57(iii) of the Act is liable to be quashed.

The Bench explained that if no income was earned by the assessee, as is the case of the Revenue authorities, then the entire interest expense ought to have been disallowed. The ITAT  allowed the assessee's appeal and concluded that the disallowance of interest expenses under section 57(iii) of the Act confirmed by the CIT(A) was incorrect and unwarranted.

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