Interest on borrowed funds for share investment allowed as deduction under section 57(iii) despite no actual income earned

ITAT Visakhapatnam allowed the assessee's appeal regarding deduction of interest expenditure under section 57. The tribunal held that interest incurred on borrowed funds utilized for investment in shares of a Singapore company was allowable as deduction. The tribunal ruled that section 57(iii) should be given natural meaning without narrow interpretation, and deduction eligibility is not conditional upon actual earning of income but on purpose of earning future income. Since investment was made for income-earning purpose and revenue authorities failed to prove otherwise, the deduction was permitted.

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Issues involved: Appeal against the order of Ld. Commissioner of Income Tax (Appeals) regarding disallowance of interest on loan under section 143(3) of the Income Tax Act, 1961 for the AY 2013-14.

Summary:

Issue 1:
The assessee appealed against the order of Ld. CIT(A)-NFAC sustaining the disallowance of interest on loan from Bajaj Financial Services under section 143(3) of the Act.

The assessee contended that the interest paid on the loan was for capital investment and should be eligible for deduction under 'income from other sources' as it was laid out for future income generation. The AR relied on a judgment of the Calcutta High Court to support this argument.

On the other hand, the Departmental Representative argued that since the investment was capital in nature, the interest paid on the loan should also be considered capital and not allowable under section 57 of the Act.

After considering both sides and the relevant legal provisions, the Tribunal examined whether the interest incurred on borrowed funds for investment in shares was a proper expenditure under section 57 of the Act.

The Tribunal referenced the Calcutta High Court judgment, which emphasized that the purpose of the investment was to generate income in the future, and that disallowing the expenditure solely because the investment was not for earning dividends was incorrect. The Tribunal found that the investment in this case was for future income and, therefore, the interest expenditure was allowable under section 57.

Based on this analysis and following the Calcutta High Court decision, the Tribunal allowed the grounds raised by the assessee and ruled in favor of allowing the deduction for interest expenditure incurred on borrowed funds for the investment in shares.

As a result, the appeal filed by the assessee was allowed, and the decision was pronounced in open court on 21st March 2024.

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