Real income principle limits taxation of routed interest, but TDS credit claimed in one name must be properly proved

Interest routed through the assessee as a facilitator could not be taxed in his hands on the gross receipt, because the real income belonged to the lenders. However, where TDS was deducted in the assessee's name and credit was claimed by him, he had to prove with bank trail or other cogent evidence that the corresponding tax benefit was passed on to the actual lenders. In the absence of such proof, the TDS-related component remained taxable in his hands. Deduction under section 57 was not allowed to the extent claimed because the assessee failed to establish actual expenditure incurred wholly and exclusively for earning the relevant income.

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Issues: Whether the gross interest amount credited in the assessee's hands and the corresponding TDS component could be brought to tax in full, and whether deduction under section 57 was allowable to the extent claimed.

Analysis: The assessee had arranged borrowings for the company, the funds were directly advanced by third parties to the company, and the company directly paid interest to the lenders. On these facts, the gross interest amount could not be assessed in the assessee's hands because the real income from interest belonged to the lenders. However, the TDS was deducted in the assessee's name and credit was claimed by him. In the absence of bank trail, reconciliation, or other cogent evidence showing that the TDS benefit was passed on to the actual lenders, the assessee failed to discharge the burden of proving that the corresponding amount was not exigible in his hands. Deduction under section 57 requires proof of expenditure laid out wholly and exclusively for earning such income, and the assessee did not establish the actual incurrence of the relevant TDS-related outgo.

Conclusion: The addition was unsustainable for the gross interest component but sustainable to the extent of the TDS amount; the assessee succeeded only in part.

Ratio Decidendi: Where interest income is not ly earned by the assessee and is only routed through him as a facilitator, the gross receipt cannot be taxed in his hands; however, if TDS credit is claimed in the assessee's name, the onus lies on him to prove that the corresponding tax benefit was actually passed on, failing which that component can be sustained in his hands.

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