2025 (7) TMI 1677 - AT - Income Tax

ITAT Upholds Section 57(iii) Interest Expense Claim, Emphasizes Consistency in Disallowance Calculations

The ITAT upheld the CIT(A)'s decision allowing the assessee's claim for interest expenditure under section 57(iii), emphasizing the rule of consistency. ... Claim of interest expenditure u/s 57(iii) - rule of consistency - AO observed that the assessee had mixed funds as well as mix utilization of funds. The funds were used for income generating activities as well as to carry out non-productive activities - CIT(A) allowed claim- HELD THAT:- It could clearly be seen that rule of consistency favors the case of the assessee. The working made by the assessee is in line with the view taken by the assessing authority in past three years. In AY 2011- 12, AO had verified the nexus of borrowed funds and made partial disallowance only whereas in this year, AO has made full disallowance which could not be held to be justified. Based on working of AY 2011-12 and considering interest on fresh borrowings as obtained during this year, the assessee has worked out proportionate disallowance of Rs. 43.45 Lacs. The majority of borrowings pertain to earlier years. No change in facts has been demonstrated before us. Therefore, no fault could be found in the adjudication of Ld. CIT(A) on this issue. Decided in favour of assessee. ISSUES: Whether interest expenditure claimed as deduction under Section 57(iii) can be disallowed in entirety in absence of direct nexus between borrowed funds and interest-earning investments.Whether partial disallowance of interest expenditure based on verification of nexus between borrowed funds and income-generating funds in earlier assessment years can be applied consistently to subsequent assessment years.Whether fresh borrowings during the relevant assessment year should be separately considered for disallowance of interest expenditure. RULINGS / HOLDINGS: On the issue of disallowance under Section 57(iii), the Court held that 'the provisions of Sec. 57(iii) allow expenditure laid out or expended wholly and exclusively for the purpose of making or earning of such income,' and in absence of direct nexus, disallowance is justified; however, full disallowance without considering prior years' verified nexus is not justified.The Court upheld the principle of consistency, finding that partial disallowance made by the Assessing Officer in AY 2011-12 after verification of nexus should guide the treatment in the present year, rejecting full disallowance as unjustified.The Court accepted that interest on fresh borrowings in the relevant year should be separately considered, confirming disallowance of interest expenditure proportionate to fresh borrowings amounting to Rs. 16.08 Lacs, while allowing the rest as claimed. RATIONALE: The Court applied the statutory framework under Section 57(iii) of the Income Tax Act, which permits deduction of interest expenditure only if it is 'wholly and exclusively' for earning taxable income.The Court relied on prior assessment years' findings where nexus between borrowed funds and interest-earning investments was verified, emphasizing the 'rule of consistency' in tax assessments.The Court distinguished between borrowings pertaining to earlier years, which had been verified, and fresh borrowings in the relevant year, requiring separate consideration for disallowance.No dissent or doctrinal shift was noted; the decision follows established principles of nexus and consistency in interest expenditure disallowance under the Income Tax Act.