2017 (6) TMI 1149 - AT - Income Tax

ITAT allows interest deduction under S.57(iii) & directs deletion of enhanced income without notice

The ITAT partly allowed the appeal, permitting the interest expenditure as a deduction under S.57(iii) due to the direct nexus between funds and interest ... Allowability of interest expenditure u/s. 57(iii) - Held that:- The assessee’s funds have been mostly utilized for loans and advances to various parties from where the assessee has earned interest income of ₹ 16,22,79,443/-. The assessee has also paid interest on secured and unsecured loans. Once the funds have been utilised for giving loans and advances to the parties on which interest income has been earned,then ostensibly cost of funds in the form of interest payment has a direct nexus with the earning of such an income. We are unable to appreciate the blanket observation of the AO that funds lying with the assessee ware not identifiable and the assessee is unable to prove the nexus. Once, both the availability and application of funds are evident from the balance sheet, then there is apparently direct nexus between earning of income from deployment of funds and expenses incurred on cost of funds. Accordingly, the assessee is eligible for claim of interest expenditure u/s. 57(iii) and the same is directed to be allowed. Addition on difference between sale and purchase - addition stands enhanced by the ld. CIT(A) by taking 1% profit on the sales figure - Held that:- Such an enhancement by the ld. CIT(A) admittedly is without complying the mandatory requirement of subsection (2) of section 251 which provides that enhancement of income by first appellate authority cannot be made without giving notice to the assessee. Consequently, such an enhancement of income cannot be sustained. Accordingly, we direct the deletion of enhanced amount of ₹ 5,52,969/- and thus, ground no. 6 is allowed. Issues Involved:1. Invocation of provisions of S.145(3) for rejecting books of accounts and making arbitrary estimate and disallowances.2. Treatment of Interest Income as Income from Other Sources instead of Business Income.3. Disallowance of interest expenses without considering submissions and arguments.4. Consideration of nexus between borrowed funds and advances for allowing Interest Expenses as Deduction.5. Disallowance of claim for deduction of administrative Expenses and Depreciation.6. Arbitrary enhancement of income without notice to the assessee.Analysis:Issue 1:The appellant challenged the invocation of S.145(3) for rejecting books of accounts and making arbitrary estimates. The AO rejected the contention based on the Bombay Moneylenders Act and held interest income as 'income from other sources.' The CIT(A) upheld the AO's decision. However, the ITAT found a direct nexus between the funds utilized for loans and advances and the interest income earned. Thus, the interest expenditure was allowed as a deduction under S.57(iii).Issue 2:The dispute revolved around the treatment of Interest Income as Business Income or Income from Other Sources. The appellant argued for business income based on RBI press release, while the AO considered it as income from other sources. The ITAT found a direct nexus between the funds utilized and the interest income earned, allowing the interest expenditure as a deduction under S.57(iii).Issue 3:The controversy involved the disallowance of interest expenses without proper consideration of submissions. The AO disallowed the interest expenditure, citing lack of direct nexus with interest income. The CIT(A) confirmed the disallowance, but the ITAT reversed the decision, allowing the interest expenditure as a deduction under S.57(iii) due to the evident direct nexus.Issue 4:The question was whether there was a nexus between borrowed funds and advances for allowing Interest Expenses as Deduction. The ITAT found a direct nexus between the funds utilized for loans and advances and the interest income earned, allowing the interest expenditure as a deduction under S.57(iii).Issue 5:The issue pertained to the disallowance of administrative Expenses and Depreciation. The AO disallowed the claim, but the ITAT did not adjudicate on this issue due to the allowance of interest expenditure as a deduction under S.57(iii).Issue 6:The challenge was against the arbitrary enhancement of income without notice to the assessee. The CIT(A) enhanced the income without giving notice, which the ITAT deemed impermissible under section 251(2). Consequently, the ITAT directed the deletion of the enhanced amount.In conclusion, the ITAT partly allowed the appeal, allowing the interest expenditure as a deduction and directing the deletion of the enhanced income amount due to lack of notice to the assessee.