Commercial Decisions Must Be Judged from Taxpayer’s Perspective, Not the Income Tax Department: ITAT [Read Order]
Commercial Decisions Must Be Judged from Taxpayer’s Perspective, Not the Income Tax Department: ITAT
![Commercial Decisions Must Be Judged from Taxpayer’s Perspective, Not the Income Tax Department: ITAT [Read Order]](https://images.taxscan.in/h-upload/2025/06/07/2041611-itat-taxpayers-taxscan.webp "Commercial Decisions Must Be Judged from Taxpayer’s Perspective, Not the Income Tax Department: ITAT [Read Order]")
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) allowed an appeal concerning the disallowance of interest expenditure under Section 57(iii) of the Income Tax Act, 1961, ruling that commercial decisions must be viewed from the taxpayer's point of view and not the Income Tax Department's. Shantiben K. Rita, the assessee, is an individual and a partner in two...
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) allowed an appeal concerning the disallowance of interest expenditure under Section 57(iii) of the Income Tax Act, 1961, ruling that commercial decisions must be viewed from the taxpayer's point of view and not the Income Tax Department's.
Shantiben K. Rita, the assessee, is an individual and a partner in two partnership firms. For the Assessment Year 2020–21, she filed her return declaring income under salary, business, and other sources. She claimed a deduction of Rs. 1,15,89,437 under Section 57(iii) against interest income of Rs. 1,17,15,147 earned from loans given out of borrowed funds.
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The Assessing Officer (AO) observed that the assessee borrowed funds at an average interest rate of 9.04% and lent them at a lower average rate of 5.22%. The AO disallowed Rs. 60,53,499 of the interest expense, arguing that there was no business justification for lending at a lower rate and restricted the deduction accordingly. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, observing that the funds were given to family members and related firms at low or no interest, which was not considered a prudent business decision.
On appeal before the ITAT, the assessee’s counsel argued that the interest expense was fully and exclusively incurred for earning income and should be allowed under Section 57(iii). They also argued that the authorities failed to consider the commercial realities of her lending decisions and applied their own standard of what constituted a prudent decision.
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The two-member bench comprising Amarjit Singh (Accountant Member) and Sandeep Singh Karhail (Judicial Member) considered the arguments from both sides. The tribunal observed that there was no evidence that the borrowed funds were used for any purpose other than earning interest income. It also observed that there was no restriction from lenders on how the borrowed funds were used.
The tribunal explained that the test of business prudence must be judged from the perspective of the taxpayer, not the tax department. It held that the Revenue cannot disallow expenditure simply because they would have made a different decision. The tribunal allowed the full deduction under Section 57(iii), deleted the disallowance of Rs. 60,53,499, and allowed the appeal.
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