2025 (10) TMI 209 - AT - Income Tax

Assessee allowed deduction under section 57; interest on borrowed funds netted; land sale credit sent back for verification

ITAT MUMBAI - AT allowed the assessee's claim for deduction under section 57, holding that interest paid on funds borrowed from a bank and advanced to the ... Disallowance of interest expenditure - AO was of the view that the loan from ICICI Bank, being sanctioned in the nomenclature of a “home loan,” had no nexus with the interest income declared, and thus he disallowed the claim - HELD THAT:- Material placed before us, and the binding decision of the co-ordinate Bench in assessee’s own case. The facts are in pari materia with those in AY 2009–10. The assessee has demonstrated that the very funds borrowed from ICICI Bank, on which interest was paid at 10.75%, were advanced to his wife yielding taxable interest at 12%. We hold that the assessee’s claim under section 57 deserves to be accepted. The concept of “substance over form” leaves no room for doubt that the netting of interest income and interest expenditure must be allowed. The disallowance sustained by the authorities below is therefore directed to be deleted. Addition u/s 68 - unexplained cash credit - assessee had declared exempt income on account of sale of agricultural land - assessee had declared exempt income on account of sale of agricultural land - HELD THAT:- On a close examination of the sale deed and the revenue authority’s certificate now placed on record, there is material to indicate that the land was indeed classified as agricultural in official records. In such a scenario, the correct course in the interest of justice is to remit this matter back to the file of the Assessing Officer with the direction to examine all evidences afresh, particularly the certificate of the Tehsildar and other corroborative records. If the land is certified to be agricultural, then the sale consideration of ₹60,00,000/- cannot be brought to tax. ISSUES PRESENTED AND CONSIDERED 1. Whether the delay of 459 days in preferring the appeal ought to be condoned having regard to the stated reasons and principles of substantial justice. 2. Whether interest expenditure paid on a bank loan (sanctioned as a 'home loan') is allowable under section 57 by netting against interest income earned from advancing the borrowed funds, when the factual matrix shows the borrowed funds were advanced to a third party (spouse) and generated taxable interest. 3. Whether proceeds of Rs.60,00,000 received and declared as exempt on account of sale of agricultural land can be treated as unexplained cash credit under section 68 where the assessee subsequently files the sale deed and a revenue authority's certificate (Tehsildar) certifying agricultural character of the land, and what is the appropriate adjudicatory course. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of delay Legal framework: Principles governing condonation of delay require demonstration of reasonable and sufficient cause for delay and absence of mala fide or deliberate inaction; matters are to be decided in the interest of substantial justice. Precedent treatment: The Court applied established discretionary principles for condonation (no new precedent invoked or overruled). Interpretation and reasoning: The assessee produced an affidavit explaining a grievous accidental injury causing incapacity and resulting reliance on household staff to deliver appeal papers, which were erroneously not forwarded. On discovery of non-filing only after receipt of a penalty notice, the appeal was prepared and filed without further delay. The Tribunal found the delay neither deliberate nor mala fide and accepted the explanation as a reasonable and sufficient cause. Ratio vs. Obiter: Ratio - condonation granted on the facts; obiter - none. Conclusion: Delay of 459 days condoned in the interest of substantial justice; appeal admitted for adjudication on merits. Issue 2 - Allowability of interest expenditure by netting under section 57 (substance over form) Legal framework: Section 57 permits deduction of expenses pertaining to income from other sources (including interest expenditure) to the extent they are incurred wholly and exclusively for the purpose of earning such income; commercial substance and nexus between borrowing and income-earning deployment are decisive. The principle of substance over form applies where the ostensible character of a loan (e.g., 'home loan') masks its actual deployment. Precedent treatment: The Tribunal relied upon and followed a binding co-ordinate Bench decision in the assessee's own earlier year (AY 2009-10) which had examined sanction/disbursement letters, bank statements and transfers, and had held that the so-called housing loan was used to advance funds to the spouse, yielding taxable interest; that decision accepted the nexus and applied substance over form to allow netting under section 57. Interpretation and reasoning: The Tribunal noted parity of facts across years: (a) loan from bank totalling Rs.79.5 lakh sanctioned as 'home loan' but evidenced by sanction/disbursement documents and bank account entries to have been transferred to the spouse; (b) interest was paid to the bank at ~10.75% while interest was charged to the spouse at 12%, and interest income was offered to tax; (c) earlier Tribunal decision had comprehensively examined documentary evidence and concluded the funds were so used. Given the absence of distinguishing features in the present year and the demonstrated inextricable link between borrowing and lending, the Tribunal applied the substance-over-form doctrine and allowed the claim under section 57, directing deletion of the disallowance sustained by lower authorities. Ratio vs. Obiter: Ratio - where documentary evidence (sanction/disbursement letters, loan account statements, bank transfers) establishes that borrowed funds were advanced to generate taxable interest, interest paid on such borrowing is deductible by netting under section 57; the earlier co-ordinate bench decision is followed as binding in pari materia. Obiter - none significant. Conclusion: Disallowance of interest expenditure deleted; netting of interest income and interest expenditure under section 57 permitted given the demonstrated nexus and the principle of substance over form; the earlier Tribunal finding is followed. Issue 3 - Taxability of Rs.60,00,000 alleged sale proceeds of agricultural land (section 68 / agricultural exemption) Legal framework: A receipt claimed to be consideration for sale of agricultural land is exempt if land is agricultural in character under relevant law; where unexplained credits are alleged under section 68, burden is on the assessee to prove genuineness and source. Revenue's classification of land as non-cultivable may lead to capital gains treatment; revenue authority certificates and sale deeds constitute material evidence to be examined by the Assessing Officer. Precedent treatment: The Tribunal did not invoke or overrule authority but applied principles requiring fresh appraisal of primary evidence (sale deed, Tehsildar certificate) by the Assessing Officer where such evidence is newly placed on record during appellate proceedings. Interpretation and reasoning: The Assessing Officer originally taxed Rs.60,00,000 as unexplained cash credit since no sale deed was produced. During appeal, the assessee furnished the sale deed and a Tehsildar certificate certifying agricultural classification; the Commissioner (Appeals) remanded the documents to the Assessing Officer whose remand report accepted the agreement but concluded the land was non-cultivable. On scrutiny, the Tribunal found material on record indicating official classification as agricultural. Given conflicting findings and the importance of primary evidence and revenue records in determining the agricultural character, the Tribunal held the correct course is remand for fresh examination by the Assessing Officer of the sale deed, Tehsildar certificate and corroborative records, and to determine taxability accordingly. Ratio vs. Obiter: Ratio - where documentary and revenue authority evidence is produced during appellate proceedings indicating agricultural character, the matter should ordinarily be remitted to the Assessing Officer for fresh examination rather than immediate treatment as unexplained cash credit; conclusions on taxability must follow fresh factual determination. Obiter - observations on specifics of Tehsildar certificate weight were incidental. Conclusion: Ground treated as partly allowed for statistical purposes; matter remitted to the Assessing Officer to examine all evidence afresh and, if land is certified agricultural, to treat Rs.60,00,000 as sale consideration of agricultural land (not taxable as unexplained cash credit).