ITAT Directs Dept. To Allow Interest Paid On Borrowings Against FD Income If Reasonable Link Exists

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT), while remanding the matter back to the department, held that the interest paid on borrowings is allowable against FD income if any reasonable link exists.

The bench of Amit Shukla (Judicial Member) and Padmavathy S. (Accountant Member) has directed the assessing officer to consider the movement in the FD account and the loan account to understand the nexus and also to consider the alternate claim of interest as business expenditure based on the facts and evidence that may be submitted by the assessee.

The appellant/assessee is a partnership firm engaged in the business of trading in shares. The assessee filed its return of income, declaring nil income. The case was selected for scrutiny, and the statutory notices were duly served on the assessee.

The assessee in the return of income has declared income from business as well as income from other sources. The assessee in the return of income for A.Y. 2017-18 has claimed interest on the loan and OD of Rs. 68,92,787, out of which Rs. 47,89,529 was claimed under Section 57 and the balances as business expenditure. For the A.Y. 2018-19, the assessee made a similar claim of Rs. 71,72,101, out of which Rs. 55,46,456 was claimed under Section 57 and the balances as business expenditure.

The Assessing Officer noticed that in the balance sheet, the assessee has shown an unsecured loan of Rs. 7,86,74,438 for A.Y. 2017-18 and Rs. 7,52,40,801 for A.Y. 2018-19. The Assessing Officer further noted that the unsecured loans have been taken from individuals at a rate of 9% interest, which was disclosed in Form 3CD as payments made to persons specified under Section 40A(2)(b).

The Assessing Officer observed that the assessee has investments in fixed deposits in banks earning 6.25% interest income. The Assessing Officer called on the assessee to furnish details of unsecured loans taken and their nexus and usage for business, details of interest paid, loan confirmation, etc.

The assessee furnished details with regard to the unsecured loans to the assessing officer.

The Assessing Officer held that the assessee could not establish the nexus between the fixed deposits made and the loans borrowed from family members. Therefore, the deduction claimed by the assessee against the interest income from fixed deposits under Section 57 cannot be allowed as a deduction. It was not established by the assessee that the expenses were incurred wholly and exclusively for the purpose of earning the income offered under Section 56.

The assessee contended that the borrowed funds were utilised by the assessee for business purposes, and the excess funds were placed in FD as a lien for the business transactions. It has offered the interest income separately under the heading ‘Income from other sources’ and restricted the claim of interest expenses against the said income to the extent of the income offered under Section 57. The assessee had not claimed more than the income offered to be taxed under ‘Income from other sources, i.e., income earned at 6.25% and expenses restricted to the same percentage.

The tribunal deemed it fit to remit the issue back to the assessing officer for de novo consideration.

Case Title: D D & Co. Versus Asst. Commissioner of Income-tax

Case No.: I.T.A. Nos.1210 & 1211/Mum/2023

Date: 28/08/2023

Counsel For Petitioner: Paras Savla

Counsel For Respondent: Riddhi Mishra

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