2025 (9) TMI 17 - AT - Income Tax

Interest on bank overdraft disallowed under s.57 for lack of nexus and proof of fund use; 10% interest upheld

Jatin Kanubhai Shah Versus DCIT, Circle – 13 (2) (2) Aayakar Bhavan

Jatin Kanubhai Shah Versus DCIT, Circle – 13 (2) (2) Aayakar Bhavan - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether interest paid on bank overdraft is allowable as deduction under the head 'other sources' (or otherwise) by establishing nexus between the overdraft interest outgo and interest income earned. 2. Whether notional interest on alleged use of interest-bearing funds for non-business purposes is taxable in the hands of the individual assessee where he personally bears interest at a higher rate despite the funds being sourced through a firm and paid interest by that firm at a lower rate. ISSUE 1 - Allowability of overdraft interest: Detailed analysis Legal framework: Deductibility of interest is governed by the provisions permitting deduction of expenses wholly and exclusively for the purpose of earning income (including interest income under 'other sources') and the requirement to establish a proximate nexus between the expenditure and the income sought to be relieved. Precedent treatment: The assessee relied upon certain case laws (not reproduced in the record before the Tribunal) argued to support allowance; the CIT(A) treated those authorities as factually distinguishable. The Tribunal received no opposing submissions or documentary material from the assessee to elaborate those precedents. Interpretation and reasoning: The CIT(A) and the Tribunal placed emphasis on the factual requirement to demonstrate how overdraft funds were utilized and to establish a direct nexus between the overdraft interest outgo and the interest income claimed. The assessee's lone, conclusory contention that the overdraft was repaid from proprietorship withdrawals was not supported by factual detail showing usage of the overdraft funds in earning taxable interest income. The Tribunal noted absence of any explanation or documentary evidence on utilization of funds; the mere possibility that funds were withdrawn from a proprietorship does not establish that overdraft monies were applied to produce interest income. Ratio vs. Obiter: Ratio - A claimant seeking deduction for interest must demonstrate, on the facts, a clear nexus between the interest-bearing borrowing and the income in respect of which deduction is claimed; unsupported assertions or absence of records justifying nexus warrant disallowance. Obiter - The appellate forum commented that cited authorities were distinguishable on facts; absent fuller discussion of those authorities, that observation is ancillary. Conclusion: The disallowance of Rs. 6,16,473 of overdraft interest was affirmed for want of factual material proving utilization of overdraft funds to earn the interest income. The Tribunal dismissed the ground for lack of evidence and on the factual findings recorded by the CIT(A). ISSUE 2 - Taxation of notional interest where assessee personally bears higher interest though funds routed via firm Legal framework: When interest-bearing funds are alleged to be used for non-business purposes, the tax treatment can involve imputation of notional interest or disallowance depending on ownership, beneficial use, and who actually incurred interest expense; tax consequences depend on facts as to payer and rate of interest borne. Precedent treatment: The assessee contended that funds were sourced through a firm and that the firm paid interest at a lower rate; the tax authorities and CIT(A) treated the matter on the basis of admitted facts before them. No contrary precedent was advanced to the Tribunal in person and no documentary evidence was produced to alter the factual matrix. Interpretation and reasoning: The CIT(A) and the Tribunal relied on the admitted position that the assessee himself was paying interest at 10% (and 13% on the OD). The fact that the firm may have sourced funds and paid interest at 6% does not negate the material fact that the assessee personally bore interest at a higher rate. The disallowance was made in the hands of the assessee (not the firm) and accordingly the relevant base for disallowance is the actual rate and incidence of interest borne by the assessee. Given the assessee's admission that interest-bearing withdrawals were used to pay off the OD and that he personally paid interest at the higher rate, the authorities' computation of notional interest in the assessee's hands was sustained. Ratio vs. Obiter: Ratio - Taxable consequence / disallowance should reflect who actually bears the interest and at what rate; a notional adjustment may be upheld in the assessee's hands where the assessee personally bears higher interest despite routing through related entities. Obiter - Observations regarding inter-party arrangements and source-supplier relationships are factual and ancillary unless supported by documentary proof demonstrating different incidence. Conclusion: The addition of Rs. 17,65,205 as notional interest (calculated at the rate borne by the assessee) was confirmed. The Tribunal dismissed the ground in view of the admitted facts and absence of rebuttal evidence or submissions before the appellate forum. Cross-references and procedural observations relevant to both issues The Tribunal proceeded ex parte due to repeated non-appearance of the assessee and absence of any adjournment request; this procedural context underpins the reliance on the factual record and on admissions made before the assessing officer/CIT(A). The Tribunal declined to remand or adjourn given multiple opportunities previously afforded. Overall disposition Both grounds were dismissed and the appellate conclusions of the revenue authorities and the CIT(A) were affirmed for lack of factual demonstration by the assessee to establish the requisite nexus or to rebut the findings that the assessee personally bore interest at the higher rate.