Partner Lending Loan to Firm out of Bank Term Loan Eligible for Deduction of Net Interest Income u/s 57 of Income Tax Act: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the deduction under section 57 of the Income Tax Act 1961 is allowable towards the net interest income received by the partner on lending a loan to the firm out of bank loan.

The assessee, Shri Mukesh KanyailalShahis a Partner in M/s. Ritesh Exports.The assessee has received interest on capital contribution of Rs. 17,60,000/- from the firm for which, the Firm has paid interest to theassessee. The loan taken by the firm from the assessee, in turn was taken by the assessee from the SBI. Thus, the assessee received interest on loan given to the firm and on the same loan taken from the bank, the assesseehas paid interest. The assessee, while filing the income tax returns for the relevant year, claimed deduction of such net interest income under section 57 of the Income Tax Act.

The AO, while concluding the proceedings, rejected the claim holding that the nexus between the income earned of Rs. 46,50,899/- and interest expenses of Rs.37,16,200/- were not established.

 A two-Member Tribunal comprising Shri Amit Shukla, Judicial Member & Shri Amarjit Singh, Accountant Member observed that there was direct nexus between earning of the interest income and interest paid.

“Accordingly, the netting of the net interest income after deducting the interest paid to the bank had direct nexus which is allowable under Section 57. This aspect of the matter was also examined by the AO and assessee has filed all the replies which were called upon by the AO. Thus, we do not find any infirmity in allowing the interest paid by the AO and therefore, order of ld. PCIT cannot be sustained, because on merits the assessment order is neither erroneous nor prejudicial to the interest of the Revenue and therefore, on merits, the appeal of the assessee is allowed,” the Tribunal said.

To Read the full text of the Order CLICK HERE

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