The two member bench of the Income Tax appellate Tribunal (ITAT), Raipur, has ruled that Expenditures incurred for earning income chargeable under “Income from Other Sources” should be eligible for deduction under Section 57, while those incurred for earning income chargeable under “Income from Business and Profession” should be deductible under Section 36(1)(iii) of the Income Tax Act, 1961.
The assessee, Rajesh Mirani, an individual, filed his income tax return on February 20, 2018, for the Assessment Year (AY) 2017-18, declaring a total income of ₹1, 08, 30,760. The case was selected for limited scrutiny under the Computer-Assisted Scrutiny Selection (CASS) system, focusing on the large deduction claimed under Section 57 of the Income Tax Act. Statutory notices under Sections 142 and 142(1), along with a questionnaire, were issued to the assessee and duly served.
The assessee derived income primarily from salary earned at M/s Rainbow Automotive Pvt. Ltd. additionally, he earned profits from shares in several partnership firms, including M/s Manilal Dayalji and Co., M/s Manilal Dayalji & Sons, M.M. Business Corporation, Ganesh Swami Lime, M.K. Infrastructure, and Rawmate Solutions, Raipur. His income also includes earnings from house property, capital gains from the sale of shares and securities, and interest income.
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Upon verification of the Income Tax Return (ITR), Audit Report, and books of accounts, along with relevant documents, the Assessing Officer (AO) observed that the assessee claimed a deduction of ₹39, 86,573 under the head “Income from Other Sources.
The assessee was asked to provide details and explain the nature of the payments related to the claimed deduction. In response, the assessee stated that loans were taken from United Bank of India (UBI) against property and were invested as partner’s capital in Rainbow Automotive and as investment in Icon Solar Energy Power Tech Pvt. Ltd. A second loan was taken from IDBI Bank for investment in property. These loans were reportedly used for investment in partnership firms and other ventures.
The AO requested detailed information on the loans taken from UBI and IDBI Bank, including bifurcation of funds, dates of entries, and interest rates paid and received. The assessee provided relevant bank statements, but the AO found that the flow of funds, as reflected in the bank statements, did not align with the assessee’s explanations. It was noted that the interest depicted in the bank statements did not show the utilization of funds as claimed by the assessee.
Mr. R.B. Doshi, representing the assessee, argued that the loan funds were used for investing in the partnership firm and advancing loans. He contended that there was a clear nexus between the borrowed funds and the funds invested, linking the interest paid with the interest received. The AR referred to documents submitted to the AO to support this claim. However, the AO had previously mentioned in the assessment order that no reply was furnished by the assessee to a show cause notice dated November 2, 2019.
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Further explained that the loan from IDBI Bank was used to purchase property, from which rental income was offered for tax. He argued that the interest expense should be allowable under Section 36(1)(iii) or Section 57 of the Income Tax Act. It also highlighted the difficulty in claiming such expenses under the head “Business and Profession” due to the lack of a specific column in the return forms. As a result, the interest paid was claimed under “Income from Other Sources.”
Mr. Satya Prakash Sharma, representing the revenue, supported the orders of the AO and the Commissioner of Income Tax (Appeals) [CIT (A)]. He argued that the assessee was unable to substantiate his claims with corroborative evidence and failed to provide satisfactory explanations. Therefore, the additions and disallowances made by the AO were justified, and the order of the CIT (A) deserved to be upheld.
The bench, comprising Ravish Sood (Judicial Member) and Arun Khodpia, (Accountant Member) considered the rival submissions and reviewed the material on record. They observed that the assessee had furnished details regarding the loans taken and their utilization in business activities. It was noted that the assessee had shown income from partnership firms, interest income allowable under Section 40(b)(iv), and interest received from private limited companies.
The bench concluded that the interest and other expenditures claimed under Section 57 should be bifurcated. Expenditures incurred for earning income chargeable under “Income from Other Sources” should be eligible for deduction under Section 57, while those incurred for earning income chargeable under “Income from Business and Profession” should be deductible under Section 36(1)(iii). Consequently, the assessee’s appeal was partly allowed.
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