Interest Expenditure allowable u/s 57(iii) against Interest Income if Direct Nexus Proved: ITAT Deletes ₹1.06 Cr Disallowance [Read Order]

If there is a direct nexus between the borrowing and lending activity, interest expenditure is allowable as a deduction under Section 57(iii) of theIncome-tax Act, 1961, ruled the Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ).

The assessee, Ankur Chandulal Shah is an individual and a partner in a partnership firm. He earned interest income of about ₹1.76 crore from loans advanced to Ariha Diamonds Jewellery Pvt. Ltd., a company in which he was a Director and shareholder.

These advances were funded out of loans taken by the assessee from family members and friends, on which interest expenditure of ₹1.06 crore was incurred.

In the return of income, the assessee had offered only the net interest income after claiming deduction of the corresponding interest expenditure under Section 57(iii)of income tax.

During assessment proceedings, due to non-compliance with statutory notices, the Assessing Officer issued an ex parte order under Section 144 and disallowed the entire interest expenditure on the ground that the assessee failed to establish a nexus between the interest paid and interest earned.

Further, appeal was preferred by the appellant before the CIT(A) with submission of additional evidence including ledger accounts. The remand report was called for by the first appeal. The tribunal, however, overturned the approach taken by the CIT(A) that the assessee failed to prove the nexus.

The bench of Makarand Vasant Mahadeokar (Accountant member) and Amit Shukla ( Judicial member) observed that “once the additional evidences were admitted and a remand report was called for, and in the absence of any adverse finding by the Assessing Officer in the remand proceedings doubting the genuineness of the transactions, it was not open to the learned CIT(A) to reject the claim merely on conjectural grounds.”

Additionally, the appellate tribunal noted the Supreme Court’s ruling in the case of CIT v. Rajendra Prasad Moody that “the expression ‘for the purpose of making or earning such income’ in section 57(iii) does not require that the income should in fact have been earned in the relevant year, and what is relevant is the intention and nexus of the expenditure with the income- earning activity.”

In the present case, according to the tribunal, not only is the intention evident, but the income has in fact been earned and taxed.

Accordingly, the bench deleted the disallowance of interest expenditure of Rs. 1.6 crore under Section 57(iii) and allowed the appeal.

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