The Jodhpur bench of the Income Tax Appellate Tribunal (ITAT) on Friday held that there is no violation of the provisions of the Income Tax Act, 1961 if the Assessee has utilized the home loan taken from the bank for advancing loans to others for earning interest.
In the instant case, the assessee has taken one-time house loan from the State Bank of India (SBI) for house construction for which the bank charged interest. The Assessee further advanced the same to others and received interest.
While completing the assessment, the assessee has claimed the said interest as a deduction under section 57 of the Income Tax Act 1961 against interest income of Rs 8629517/- which was received from various persons and parties to whom the advances were given on interest towards. However, the Assessing Officer disallowed the interest expenditure by holding that the assessee has not claimed the deduction under the head “Income from House Property.”
The bench noted that the assessee has demonstrated that he has earned substantial interest income out of such advances. Before allowing the interest expenditure against the interest income, the burden is on the assessee to prove that the amount so borrowed has been actually and directly used for the purpose of advancing loan on which interest income has been earned. One to one link is required to be established in respect of utilization of interest-bearing funds so borrowed.
“Merely because the loan was sanctioned for housing purpose, it cannot be said that the assessee cannot use it for advancing loans to others for earning interest. It may amount to the violation of terms and conditions of the agreement so entered with the bank while sanctioning of the loan, but there is no contravention under the Income Tax Act for advancing such funds for earning interest income,” the bench said.
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