Assessee wins full deduction of interest expenditure under section 57(iii) despite income restriction by lower authorities

The ITAT Mumbai allowed the assessee's appeal regarding deduction of interest expenditure under section 57(iii) of the Income Tax Act. Despite the assessee earning Rs. 41 lakhs in bank interest, the CIT(A) had restricted the deduction to the extent of income earned from term deposits. The ITAT held that the assessee was entitled to full deduction of interest expenditure that was laid out wholly and exclusively for earning such income, following precedent from coordinate bench decisions. The tribunal also directed the AO to compute interest under section 234B according to pre-2012 provisions for assessment year 2006-07, as the proviso to section 209(1) was effective from April 1, 2012.

---

---

Issues Involved: Deduction of interest expenditure, chargeability of interest u/s 234B, and correction of income computation.

Issue 1: Deduction of Interest Expenditure

The assessee, Harsha Estate Private Limited, appealed against the CIT (A)'s decision to restrict the deduction of interest expenditure to Rs. 3,520,886/- out of a claimed Rs. 32,795,923/-. The assessee argued that the entire amount should be deductible. The Tribunal noted that the CIT (A) had restricted the deduction based on the proportionate interest income earned and the lack of bifurcation of interest expenses. The Tribunal referenced previous decisions in similar cases, including the assessee's own case, and directed the AO to allow the full deduction of Rs. 32,795,923/-. The same decision was applied to the assessment years 2005-06 and 2006-07, allowing the full claimed interest expenditure for those years as well.

Issue 2: Chargeability of Interest u/s 234B

The assessee contended that the interest u/s 234B was not calculated correctly. The Tribunal found that the CIT (A) had addressed the issue but directed the AO to compute the interest in accordance with the law prevailing for the relevant assessment year. This decision was consistent for the assessment years 1999-2000, 2005-06, and 2006-07, with the AO being instructed to recompute the interest u/s 234B as per the applicable provisions.

Issue 3: Correction in Income Computation

The assessee raised an additional ground stating that the AO did not carry out the CIT (A)'s direction to adjust the interest income. The Tribunal directed the AO to compute the correct income as per the CIT (A)'s direction, acknowledging the need for correction in the order.

Conclusion

The appeals for the assessment years 1999-2000, 2005-06, and 2006-07 were partly allowed. The Tribunal directed the AO to allow the full deduction of interest expenditure, recompute interest u/s 234B as per the law, and correct the income computation as per the CIT (A)'s direction.

Order pronounced in the open court on 21.03.2024.

---