2023 (4) TMI 816 - AT - Income Tax

Tribunal allows appeals on interest expenditure, business loss, and loan interest disallowance under section 57(iii)

Mr. Ashok Kaushik Versus Asst. CIT Circle-31 (1) New Delhi

The Tribunal allowed all appeals of the assessee related to interest expenditure, business loss, and the disallowance of interest paid on a loan for ... Allowability of deduction of interest expenditure u/s 57 - Interest claimed as expenditure against the interest paid on loan taken from ICICI Home Finance - Interest claimed as expenses only up to the interest earned on FDR made out of the loan taken - interest has not claimed other source of income, but claimed upto the income earned and allowed in A.Y.2009-10 completed u/s 143(3) - HELD THAT:- It is not in dispute that the assessee could not obtain the requisite permission from the competent authority for proceeding with the additional floor construction. Since, the loan amounts were lying idle with the assessee, the assessee thought it fit to use the said loan funds by making investment in fixed deposits with ICICI Bank and State Bank of Patiala. Hence, it is crystal clear that loan funds received by the assessee were directly utilized for making investment in fixed deposits. Admittedly, the interest income earned on fixed deposit is taxed under the head of interest income u/s 56 of the Act. The provisions of section 57(iii) of the Act categorically provide for allowability of deduction of interest expenditure that has been incurred for the purpose of earning exempt income. When the claim has been in accordance with the statutory allowable provision by the assessee, the action of the lower authorities dismissing the plea thereon without even considering the provisions of the Act cannot be sustained. Hence, we direct the Ld. AO to allow the interest claimed by the assessee in the sum u/s 57(iii) of the Act. Allowability of business loss - AO had disbelieved the fact that the assessee had not carried on any business and, accordingly, the entire business expenditure were disallowed - HELD THAT:- AO himself while disallowing certain business expenditure on adhoc basis partially, had practically conceded to the fact of assessee carrying on the business. AO made adhoc disallowance of driver salary, labour charges, manager salary, Security Guard etc. @ 60% in AY 2014-15, which goes to prove that remaining 40% of the very same expenditure would be allowable as business expenditure. This clearly proves that the Ld. AO himself in AY 2014-15 had accepted the fact that assessee was indeed carrying on business. The reasons for business not being conducted in full fledged manner in AY 2013-14 was also clearly explained by the assessee that he was not well during the year under consideration i.e., AY 2013-14. The business of the assessee was never closed. Hence, once the business is continued, there is absolutely no justifiable reasons for the Ld. AO to disallow the business loss entered thereon. Accordingly, we direct the Ld. AO to allow the business loss claimed for AY 2013-14. ISSUES PRESENTED AND CONSIDERED 1. Whether interest paid on loan raised for construction (but temporarily invested in fixed deposits pending permission) is allowable as a deduction under section 57(iii) where interest on the FDRs is taxable under the head 'income from other sources'. 2. Whether the business loss claimed is allowable where the assessee let out the front portion of the business premises to a tenant but continued business operations from a shed at the back of the same premises (including assessment of evidentiary sufficiency for continuation of business). 3. Whether the reasoning and orders of the lower authorities (Assessment Officer and Commissioner (Appeals)) in disallowing the interest and business loss are sustainable in view of the statutory provisions and on record evidence (including reliance on existing judicial precedent by the lower authorities). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of interest paid on loan used to earn taxable interest on deposits (s.57(iii) applicability) Legal framework: Section 57(iii) allows deduction of expenditure incurred for earning income referred to in section 10(36)/income of specific kinds/expenses incurred for earning exempt income or income chargeable under the head 'Income from Other Sources' when provisions so permit; interest on fixed deposits is taxable under 'Income from Other Sources' (s.56 or corresponding provisions). Precedent Treatment: The AO relied on a Supreme Court decision (referred to by the AO) to the effect that interest income on deposits is taxable under 'income from other sources.' The Tribunal treated that decision as not operating to deny the specific statutory deduction under s.57(iii) where loan funds were directly used to create the deposit yielding that interest. Interpretation and reasoning: The Tribunal found as a factual and legal matter that (a) the loan was obtained specifically for construction of an additional floor; (b) construction could not proceed for want of statutory permission; (c) loan proceeds were invested in fixed deposits pending permission; and (d) interest earned on those FDRs was taxable under the head 'income from other sources.' Given that the loan funds were directly utilized to make the FDRs, the interest paid on the loan was incurred for the purpose of earning the deposit interest. The Tribunal held that a claim made in accordance with the statutory provision (s.57(iii)) must be allowed and that the lower authorities erred in dismissing the claim without proper application of the statutory provision. The Tribunal therefore directed allowance of the interest claimed under s.57(iii). Ratio vs. Obiter: Ratio - where borrowed funds intended for a capital project are temporarily invested in interest-bearing deposits and the interest so earned is taxable under 'income from other sources,' interest on such borrowing is deductible to the extent permitted by section 57(iii) because the expenditure was incurred for earning that income. Obiter - observations on the inapplicability of the cited Supreme Court decision only insofar as it was applied to deny relief under s.57(iii) in these facts. Conclusion: Interest paid on the loan in the stated amount is allowable under section 57(iii) because the loan monies were directly used to earn interest on fixed deposits and the statutory provision for deduction is satisfied; the AO and CIT(A) were directed to allow the claimed interest. Issue 2 - Allowability of business loss where business shifted from front portion (let out) to shed at rear (continuation of business; evidentiary sufficiency) Legal framework: Business losses and business expenses are allowable when they are incurred wholly and exclusively for the purposes of the business, subject to proof that the business was being carried on during the relevant year; lease agreements, confirmations and accounting records are relevant evidence of continuity of business operations. Precedent Treatment: The Tribunal relied upon contemporaneous documentary evidence and assessment proceedings in a subsequent year to test consistency of factual conclusions reached by the AO. The AO's contrary inference (that no business was carried on) was examined against evidentiary material on record. Interpretation and reasoning: On facts the Tribunal found that (a) the assessee rented out the front portion but continued to operate from the shed at the rear of the same premises; (b) a rent/lease agreement expressly reserved the shed for the lessor's use and the tenant confirmed that the shed was not leased; (c) the assessee declared a small business income in the year under review and produced profit and loss entries showing business-related expenditures; (d) in the subsequent assessment year the AO's own partial disallowances (adhoc reductions) implicitly recognized that some business activity had been carried on. The Tribunal held that ordinary business expenditure (salary, repairs, professional fees, etc.) may be incurred even when business activity is not full-fledged and that the existence of such expenses, coupled with lease terms and tenant confirmation, sufficiently established continuation of the business in the shed. The AO's wholesale disallowance was therefore not justified. Ratio vs. Obiter: Ratio - where documentary evidence (lease terms reserving certain premises to the lessor, tenant confirmation, profit & loss entries, and consistent treatment in related assessments) establishes that business activity continued at a different part of the same premises, business loss and associated expenditures are allowable; mere partial curtailment of operations or reduced scale does not convert deductible business expenditure into non-deductible items. Obiter - comments on the health of the proprietor as explanatory of reduced activity are factual observations ancillary to the ratio. Conclusion: The business loss claimed was allowable; the AO's disallowance was set aside and the loss directed to be allowed in the stated amount for the assessment year. Issue 3 - Validity of lower authorities' reliance on precedent and failure to apply statutory provisions Legal framework: Administrative orders must apply the correct statutory provision and evaluate applicability of judicial precedent on the facts; denial of a claim under a specific statutory provision requires proper legal application and fact-finding. Precedent Treatment: The Tribunal held that reliance by the AO on the Supreme Court decision to categorize interest on deposits as 'income from other sources' did not, by itself, justify denial of a deduction under section 57(iii) where the statutory test for that deduction was satisfied. The cited precedent did not overrule or negate the statutory allowance; instead, the Tribunal treated the AO's application of the precedent as misplaced. Interpretation and reasoning: The Tribunal emphasized that where a taxpayer's claim conforms to the statutory language and supporting facts demonstrate the causal link between expenditure and earning of the income, the claim must be allowed. The AO's dismissal without applying s.57(iii) properly was an error of law and fact. Ratio vs. Obiter: Ratio - a judicial precedent identifying the head of chargeability of income (e.g., deposit interest as 'other sources') does not automatically negate a separately enacted deduction provision (s.57(iii)); administrative reliance on such precedent must be contextually correct. Obiter - remarks on proper application of statutory provisions in assessment proceedings. Conclusion: The AO and CIT(A) erred in their treatment of both issues; the Tribunal allowed the interest deduction under s.57(iii) and allowed the business loss, directing revisional action consistent with these conclusions for the assessed years (with appropriate figure adjustments where necessary and applied mutatis mutandis to subsequent assessment years reviewed).