Interest deduction under section 57(iii): interest expenditure allowed where borrowings used to advance loans and taxed interest establishes nexus

Dispute concerns allowance of interest expenditure against interest income under the head "Income from Other Sources". The decision applies the intention-and-nexus test: because borrowings were used to advance loans that generated taxable interest and confirmations, ledgers and computations establish a proximate nexus, the deduction cannot be denied merely for want of documentary linkage when genuineness was not impeached. The appellate rejection based on conjecture despite admitted additional evidence and an unchallenging remand report was found unsustainable, resulting in allowance of the claim.

---

---

Issues: Whether the interest expenditure of Rs. 1,06,32,156 claimed by the assessee is allowable as deduction under section 57(iii) of the Income-tax Act, 1961 against interest income.

Analysis: The Tribunal examined the factual and documentary material admitted during the first appellate proceedings, including confirmations, ledger accounts and computation of income, and the remand report called from the Assessing Officer. The Tribunal noted that interest income from loans advanced to M/s Ariha Diamonds Jewellery Pvt. Ltd. was disclosed and offered to tax, and that borrowings used to fund those advances attracted interest which was paid by the assessee. Having considered the statutory test under section 57(iii) and the authorities on intent and nexus, the Tribunal found that the material on record established a direct and proximate nexus between the interest paid and the interest income earned; the Assessing Officer had not challenged the genuineness of the income or expenditure in the remand proceedings; and the denial of deduction solely for lack of documentary linkage was not sustainable in view of the admitted evidence and remand process.

Conclusion: The disallowance of interest expenditure of Rs. 1,06,32,156 under section 57(iii) is set aside and the appeal is allowed in favour of the assessee.

Ratio Decidendi: Deduction under section 57(iii) is allowable where the expenditure is incurred wholly and exclusively for the purpose of earning income from other sources and a direct/proximate nexus between the expenditure and such income is established; admission of relevant evidence and absence of adverse findings in remand proceedings preclude rejection of the claim merely for lack of formal documentary linkage.

---