ITAT allowed deduction of interest paid on borrowed money though no interest was earned on its further lending

ITAT ALLOWED DEDUCTION OF INTEREST PAID ON BORROWED MONEY THOUGH NO INTEREST WAS EARNED ON ITS FURTHER LENDING

FACTS

1. Assessee is an individual and reported income from other sources i.e. interest income of Rs. 29,45,261 and income from partnership firm of Rs. 2,03,113 in his return of income for the A.Y. 2015-16.
2. Assessee took loan from financial institutions and advanced it to his sister concerns in which he and his relatives are major shareholders. Further, assessee himself disallowed in his return of income, excess interest paid to lender u/s 57(iii) of The Income Tax Act, 1961 (the Act) being the interest expenditure incurred by him to borrow loan and only claimed proportionate deduction with respect to interest received from its sister concerns.
3. Assessing Officer (AO) concluded that the deduction claimed by assessee was not in accordance to the section 57(iii) of The Act as the expenditure was not incurred with intention to earn any income therefore AO disallowed the deduction of Rs. 49,38,149 and added the same to assesee’s income.

    CLARIFICATION

1. The CIT(A) confirmed the addition made by AO on the grounds that deduction is only allowed when expense is made to earn further income. In the present case the interest at which loans were given to sister concerns was either at equal rate or less than the rate of interest at which loan was borrowed by the appellant. Hence, there can be no question of earning any positive income out of the transaction by the appellant.
2. The ld. Counsel concluded that the contentions made by AO were not based on proper facts as he had not established proper nexus between payments and receipt of interest. Hence Ld. CIT(A) was not justified in confirming the findings of the AO.
3. The Ld. Counsel emphasized on the fact that for the purpose of claiming deduction u/s 57(iii) of The Act, the expenditure must be wholly or exclusively for the purpose of making or earning income. It does not say that the expenditure shall be deductible only if any income is made or earned.
4. In the present case the assessee has advanced money to its sister concerns at rate of interest either equal or less and accordingly assessee has not claimed deduction of the interest amount paid in excess to interest received u/s 57(iii) of The Act for the purpose of earning interest from investment which will be assessed under the head “Income from Other Sources”. Hence the above points are immaterial whether profit out of such expenditure is made or not, it would be sufficient to claim deduction if there is a nexus between income earned and amount expended.

CONCLUSION

Based on the above facts and clarifications, all the requirements for claiming deduction u/s 57(iii) of The Act are fulfilled and therefore assesee’s claim of interest of Rs. 49,38,149 laid out “wholly and exclusively” for the purpose of earning interest shown under the head “Income from Other Sources” and therefore same is allowed as deduction u/s 57(iii) of The Act.

Source: [2020] 113 taxmann.com 10 (Agra – Trib.)