2021 (6) TMI 530 - AT - Income Tax

Appeal Remanded for Deduction Claim Disallowance under Income Tax Act - Fresh Examination Required

The appeal concerning the disallowance of a deduction claimed under Section 57(iii) of the Income Tax Act, 1961, amounting to Rs. 40,53,426 was remanded ... Disallowing the deductions u/s 57(iii) - interest expenses incurred which were claimed against interest income earned by the assessee and returned under the head “ income from other sources” - Case of assessee was selected for limited scrutiny under CASS for one of the reason being large deduction claimed u/s 57 - HELD THAT:- As pointed out to both the Ld. DR and the Ld. Counsel for the assessee that in the impugned case it appeared that the issue had been adjudicated dehors the facts relating to it. That despite the specific submissions of the assessee before the lower authorities of the investment having been made out of interest bearing funds and the assessee having filed certain copies of accounts relating to the loan taken and investment made, the findings of the lower authorities that the assessee was unable to establish nexus between the two, does not deal with the aforestated submissions at all. At the same time, assessee was also unable to demonstrate before us as to how the submissions of the assessee justified his claim, though he contended that this was not the only year in which the assessee had made this claim and that similar claim had been made in earlier years also since a portion of the investment had been made out of loans taken in earlier years. In the absence of the necessary facts relating to the issue, we are of the view that it would not be fair to adjudicate the issue either ways. That it would be in the interest of justice to restore the matter to the AO for reexamination after considering all facts relating to it. Issue of claim of deduction u/s 57 (iii) is restored back to the AO to be decided in accordance with law after considering all facts relating to the same - Decided in favour of assessee for statistical purposes. Issues Involved:1. Disallowance of deduction claimed under Section 57(iii) of the Income Tax Act, 1961.Detailed Analysis:1. Disallowance of Deduction Claimed Under Section 57(iii):The primary issue in this appeal concerns the disallowance of a deduction claimed by the assessee under Section 57(iii) of the Income Tax Act, 1961, amounting to Rs. 40,53,426/-. This deduction pertains to interest expenses incurred, which the assessee claimed against interest income earned and reported under the head 'income from other sources'.During the assessment proceedings, the Assessing Officer (AO) scrutinized the large deduction claimed under Section 57. The AO noted that the assessee had taken loans from Cholamandalam Investment and Finance Company Limited and TATA Capital Housing Finance Limited, which were invested in a firm named M/s Rahul Sales and in mutual funds. The interest paid on these loans was claimed as a deduction under Section 57. However, the AO disallowed the deduction, stating that the assessee failed to prove how the expenditure was incurred for the purpose of earning the income, thus disallowing the expenses claimed under Section 57 amounting to Rs. 40,53,426/-.The assessee contended that the interest income earned from M/s Rahul Sales and mutual funds, amounting to Rs. 31,32,987/-, was returned under 'income from other sources', and the interest paid on the loans used for these investments should be deductible under Section 57. Despite providing copies of accounts and explanations, the AO concluded that the assessee did not establish a clear nexus between the interest expenses and the income earned.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, agreeing that the assessee failed to establish the required nexus between the loan taken and the interest paid thereon, and how this expenditure related to the income earned. The CIT(A) emphasized that under Section 57(iii), the expenditure must be incurred wholly and exclusively for the purpose of making or earning income from other sources. The CIT(A) referenced various judicial pronouncements to support this interpretation, ultimately concluding that the assessee did not meet the burden of proof to establish the nexus between the interest expenses and the income earned.Upon appeal to the ITAT, the assessee reiterated the arguments made before the lower authorities. The ITAT noted that the issue had been adjudicated without fully considering the facts. Specifically, the ITAT observed that the assessee's submissions regarding the investments made from interest-bearing funds were not adequately addressed by the lower authorities. The ITAT highlighted that the assessee had made similar claims in preceding years, although these were not subjected to scrutiny assessments under Section 143(3).Given the lack of necessary facts and detailed examination, the ITAT decided that it would be unjust to adjudicate the issue without further investigation. Therefore, the ITAT restored the matter to the AO for reexamination, directing the AO to consider all relevant facts and the assessee to produce necessary documents to substantiate the claim.Conclusion: The appeal was allowed for statistical purposes, with the issue of the deduction claim under Section 57(iii) being remanded to the AO for a fresh decision based on a thorough examination of all pertinent facts and documentation.