Interest paid on borrowings are allowable against FD income only if reasonable nexus exists between them

While considering the claim of deduction under Section 57 of Income Tax Act, 1961, the Mumbai ITAT remitted the matter back to the Revenue Department with a direction to consider the movement in the Fixed Deposit account as well as the loan account to understand the nexus between them.

The Division Bench comprising of Shri Amit Shukla, Judicial Member and Smt. Padmavathy S, Accountant Member observed that for the purpose of claiming deduction under Section 57, it is important to establish that the expenditure (not being in nature of capital expenditure) is laid out or expended wholly and exclusively for the purpose of making or earning such income.

Accordingly, the Coram directed the Revenue Department to consider the alternate claim of interest as business expenditure based on facts and circumstances.

Advocate Paras Salva appeared for the Assessee while Revenue was represented by Ms. Riddhi Mishra and Ms. Mahita Nair, CIT DR.

Briefly, the Assessee, a partnership firm, filed return of income and claimed interest on loan and overdraft of Rs.68.92 Lac out of which an amount of Rs. 47.85 Cr was claimed under Section 57 and balance as business expenditure. During assessment, the AO held that the Assessee failed to establish the nexus between the fixed deposits at 6.25% as against the loans borrowed from family members at 9%, accordingly, disallowed interest expenditure on loan under Section 57 on the premise that Assessee failed to establish that the expenditure was incurred wholly and exclusively for the purpose of earning income offered to tax under Section 56.

After considering the submission, the ITAT observed from the perusal of the balance sheet of the Assessee as on Mar 31, 2017 and Mar 31, 2018, that there cannot be a one-to-one match between the loan amount used for investing in FD and used for business.

The Bench observed from perusal of the partner’s capital account, that there is a considerable credit balance (own funds) and there is also sizeable balance shown under the head ‘span margin’ in the asset side which substantiates the claim that there is no one to one match between the source and the investments.

The Bench further observed that amount borrowed from related parties has been used for investment in FD as well as business purpose has merits.

Finding that the Revenue has not considered the movement in the loan account details submitted by the Assessee and also has not considered the fresh FDs and renewal of FDs before concluding that the entire claim is not allowable under Section 57, the ITAT directed the Department to consider the alternate claim of interest as business expenditure based on the facts and evidences that may be submitted and giving an opportunity of being heard to the Assessee.

Cause Title: D D & Co. vs. The Asst. Commissioner of Income tax [I.T.A. Nos.1210 & 1211/Mum/2023 / 2023-Enterslice-14-ITAT-Mum]

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