Business connected interest expense allowable where documentary nexus links cash credit liabilities to deposit income, disallowance set aside.

Interest on a cash credit account incurred to discharge liabilities of an erstwhile proprietary chemicals business was held to have a sufficient nexus with bank fixed deposit income, supported by documentary records and bank enquiry, and therefore constitutes business connected interest expense. The analysis treats the interest as arising from business related liabilities that formed part of the financial transactions of the former business; consequently the interest expenditure is allowable against gross bank deposit interest income and the prior disallowance is set aside, recognising the documentary linkage as determinative for allowability.

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Issues: Whether the interest expenditure of Rs. 8,61,629/- paid on a cash credit account is allowable against the gross bank fixed deposit interest income for Assessment Year 2010-11.

Analysis: Relevant facts include that the assessee previously carried on a chemicals business as a sole proprietorship which ceased operations in financial year 2008-09, the assessee had cash credit facilities with a bank, audited financial statements were filed up to A.Y. 2009-10, and interest on the cash credit account was paid during the year to discharge outstanding creditors relating to the erstwhile business. The assessee declared bank fixed deposit interest as income and claimed the cash credit interest as expenditure in the computation. Documentary linkage between the cash credit account and the erstwhile business was acknowledged by the tax officer, including bank enquiry u/s. 133(6) of the Act. On these facts, the interest expenditure arises out of business-related liabilities and is connected to income from bank deposits which were part of the financial transactions of the erstwhile business. The disallowance confirmed by the lower authority did not outweigh the established nexus and documentary record showing the business origin of the liabilities and payment of interest.

Conclusion: The interest expenditure of Rs. 8,61,629/- is allowable against the gross bank fixed deposit interest income; the disallowance by the assessing and appellate authorities is set aside and the claim is allowed in favour of the assessee.

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