TaxTMI 
TaxTMI 
2025 (7) TMI 122
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....-19 (for assessment year 2019-20 revised return of income at Rs. 49,44,190/-). A search and seizure action u/s 132 of the Act was conducted in the case of the assessee on 16.01.2019. In response to the notice u/s 153A of the Act issued on 09.09.2019 the assessee filed his return of income on 30.11.2020 declaring total income of Rs. Nil. The Assessing Officer issued and served statutory notices u/s 143(2) and 142(1) of the Act in response to which the AR of the assessee filed the requisite details from time to time. 3. During the course of assessment proceedings the Assessing Officer noted that the assessee, in the original return of income filed u/s 139(1) of the Act, has shown income from self occupied house property at Rs. Nil. However, in the return filed in response to the notice u/s 153A of the Act the assessee has claimed deduction u/s 24(b) of the Act on account of interest paid on housing loan amounting to Rs. 2 lakh resulting in loss of Rs. 2 lakh which has been set off against the other income of the previous year. He, therefore, asked the assessee to furnish evidence in respect of housing loan availed, copy of the loan account statement and the certificate from the ba....
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....er noted that the amount of interest received is less than the interest paid meaning thereby that the assessee has diverted the borrowed funds to other concerns from which no interest has been received. He, therefore, asked the assessee to show cause as to why the claim of interest expenditure should not be restricted to the amount of interest received as was done by the assessee in the preceding years. The assessee filed elaborate details justifying his claim. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee and disallowed an amount of Rs. 1,43,29,828/- by observing as under: "4.4 The submission made by the assessee has been carefully considered and not found acceptable. The assessee has claimed expense on account of interest paid on the funds borrowed which was partly invested in other firms from which exempt income was received or no income was received. It is also a fact that out of such investments, the assessee has also shown interest income at Rs. 3,51,47,867/- in the final computation of income. But, the facts remain that the assessee has also not been able to explain how the interest bearing funds were utilized. ....
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....or AY 2018-19 falls in the category of 'abated assessment'. The Hon'ble Bombay High Court in the case of JSW Steel Ltd. (supra) has observed that where an assessee filed an original return of income u/s. 139 and while assessment was pending, assessee again in response to notice u/s 153A filed another return by making new claim, since the assessment got abated, it is open for the assessee to lodge a new claim in a proceeding u/s. 153A of the Act which was not claimed in his regular return of income and the AO was not justified in rejecting such claim of the assessee. 9. Thus, the ratio laid down by the Hon'ble Bombay High Court in the case of JSW Steel Ltd. (supra) is squarely applicable to the facts of the present case because the assessment for AY 2018-19 falls in the category of abated assessment. 10. It is however seen from the assessment order, that the claim of deduction of Rs. 2,00,000/- on account of interest paid on housing loan for self-occupied property was rejected by the AO on technical ground as well as for the reasons that the assessee failed to furnish any supporting evidence to prove the payment of interest on the housing loan taken....
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.... interest expense in proportion to total loan and capital in four firms vis-à-vis the debit balance in capital account of M/s. Gagan Ace Developers cannot be accepted. 16. It is further seen that the deduction u/s. 57(iii) of the Act is allowed only for those expenses which are made wholly and exclusively for the purpose of earning such income. It is seen from the assessment order that during the assessment proceedings, the AO had specifically asked the assessee to explain how the interest-bearing funds were utilized. Same details were not filed by the appellant. Moreover, the appellant has not substantiated that the sole purpose of capital withdrawn was earning of interest income and commission income. The onus of substantiating that the purpose of capital withdrawn was for earning income from other sources is on the appellant which has not been discharged by him. 17. Further, it is not understood as to how the appellant incurred expenses for earning interest on income tax refund/interest from banks. Furthermore, the appellant has not made any effort to demonstrate as to how the interest-bearing loan were used for earning commission income of Rs. 1,41,34,8....
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....om the bank regarding the payment of interest and principal. Further, the Assessing Officer also held that the assessee cannot make a new claim in the return filed in response to notice u/s 153A of the Act. We find the Ld. CIT(A) although held that the assessee can make a new claim in proceedings u/s 153A which was not claimed in his regular return of income since the assessee filed original return of income u/s 139 of the Act and while the assessment was pending the assessee again in response to notice u/s 153A filed another return making a new claim, however, rejected the same in absence of documentary evidence filed before him. We find the Revenue is not in appeal against the finding of the Ld. CIT(A) that the assessee can make a new claim in the abated assessment in light of the decision of the Hon'ble Bombay High Court in the case of PCIT vs. JSW Steel Ltd. reported in 270 Taxman 201 (Bom). It is the prayer of the Ld. Counsel for the assessee that given an opportunity, the assessee is in a position to substantiate his case by filing the requisite details before the Assessing Officer. Considering the totality of the facts of the case and in the interest of justice, we deem it p....
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....Officer and the Ld. CIT(A). 18. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case disallowed an amount of Rs. 1,43,29,828/- out of interest expenditure of Rs. 4,94,77,695/- claimed by the assessee on the ground that the assessee has received interest income of Rs. 3,51,47,867/- only and that the assessee might have diverted the interest bearing funds for investment in partnership firms whose income is exempt or from where no income is received since the rate of interest received and interest paid is same. The relevant observations of the Assessing Officer for disallowance of the said amount has already been reproduced in the preceding paragraphs. We find the Ld. CIT(A) confirmed the action of the Assessing Officer, the reasons of which have also been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that the incurring of expenditure towards interest is not doubted by the Assessing Officer since he has....
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....rates or lower rates. The ld. CIT(A) has mentioned that the conditions for allowability under section 57(iii) is that whether the said expense was expended or laid down for the purpose of making or earning income against which it was claimed as deduction, and since the loans were given to the sister concerns either at either equal rates or less than the rate at which funds were borrowed by the assessee and therefore, there can be no question of earning any positive income out of the loan transactions entered into by the appellant assessee. The Ld. CIT(A) has further observed that for allowability of deduction under section 57(iii) it is essential that the said expense should be laid out or expended wholly and exclusively for the purpose of making or earning income against which it is claimed as deduction where in the present case the borrowed funds have been given to four private limited companies, in all of which he and/or his family members are directors or major stakeholders and that no purpose of giving the loans to the four companies has been specified by the appellant either before the authorities below or during the present proceedings. However, on an appreciation of the fac....
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....claimed bogus expenditure in the garb of interest expenses. 10. We are of the view that it is not necessary that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not necessary with a view to an immediate benefit to the assessee but voluntarily and on the ground of necessity and in order indirectly to facilitate the making or earning of the income. (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income (income chargeable under the head "income from other sources'). This means section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively 'for the purpose of making or earning such income". In order that expenditure may be admissible under section 57(iii), if it is proved that the primary motive of incurring such interest expenses is directly to earn income under the head "income from other sources". 11. The natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within purview the section, it is not necessary that any income....
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....he assessee has made profit out of such expenditure or not. For claiming deduction u/s 57(iii) of the income tax act it would be sufficient to prove that there is nexus between the income earned and amount expended. In view of that matter, all the requirements for claiming deduction u/s 57(iii) of the income tax act, 1961 are fulfilled and therefore assessee's claim of interest of Rs. 49,38,149/- laid out "wholly and exclusively" for the purpose of earning interest shown under the head "Income from Other Sources" can be legally allowed u/s 57(iii) of the Act. 14. The Ld. CIT(A) while over ruling the judgement of Commissioner of Income Tax vs Smt. Swapna Roy (supra), has over stretched the interpretation of the condition precedent to avail the benefit of s. 57(iii) of the Act viz. the investment must be proper and justified to be satisfied. In paragraph no. 68 of its order, after referring-to and relying upon the judgment of the apex court in the case of CIT vs Rajendra Prasad Moody (supra), Hon'ble Allahabad High Court has concluded that "proper investment means correct investment with intention to earn profit but their lordships have nowhere held positive income. Without ....
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....ons refer to two provisions which have been brought to our notice by the learned senior counsel. Mr Gupta would rely on Section 36 as also Section 57. Section 36 insofar as it is relevant, states that the deductions provided in the clauses following sub-section (1) shall be allowed in respect of matters dealt with therein in computing the income referred to in Section 28. The learned senior counsel appearing for the revenue submits that Clause (i) in this subsection provides for the amount of interest paid in respect of capital borrowed for the purpose of business or profession. 8. The learned senior counsel then relied on section 57 of the said Act and would urge that the deductions therein referred to the income chargeable under the head "income from other sources. That income shall be computed after deductions are made and one of the deductions is allowed in respect of an expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. 9. In the first decision cited before us by Mr. Mistry, the Hon'ble Supreme Court dealt with a case of the assesses who were brothers. ....
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....tible under Section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. The argument of the revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income. The making or earning of income said the revenue, was a sine qua non to the admissibility of the expenditure under Section 57(iii) and, therefore, if in a particular assessment year there was no income, the expenditure would not be deductible under that section. The revenue relied strongly on the language of Section 37(1) and, contrasting the phraseology employed in section 57(iii) with that in Section 37(1), pointed out that the legislature had deliberately used words of narrower import in granting the deduction under Section 57(iii), Section 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head "Profits or gains of business or profession" The language used in Section 37(1) was "laid out or expended for t....
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....n. This means that in a case where the expenditure is Rs. 1000/-, if there is income of even Rs 1/-, the expenditure would be deductible and there would be resulting loss of Rs. 999/- under the head 'income from other sources". But if there is no income, then, on the argument of the revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil, whatever is the proper expenditure allowed by the statute would be debited Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to app....
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....income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. The Hon'ble Supreme Court gave an illustration in that regard and held that the when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. The Hon'ble Supreme Court held that how expenditure which is otherwise a proper expenditure can cease to be a such merely because there is no receipt of income, has not been explained by the revenue at all. It is in these circumstances the Hon'ble Supreme Court held that Section 57(iii) does not require that the purpose must be fulfilled so as to be expenditure qualified for deduction. The language of the section does not admit of a construction that the expenditure shall be debited only if any income is made or earned. The Hon'ble Supreme Court, therefore, has concluded the issue and in our opinion, in favour of the revenue. In doing that, the Hon'ble Supreme ....
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.... DCIT 2024 (3) TMI 771 - ITAT Ahmedabad vide ITA No.429/Ahd/2018, order dated 15.03.2024 has observed as under: "5. We have heard both the parties and have also gone through the orders of the authorities below. After careful consideration of all of the above, we hold that the disallowance made of interest in the present case u/s. 57(iii) of the Act is not sustainable. The reason for the same is simple. As is evident from the order of the AO reproduced above, he has disallowed that portion of the interest expense incurred on loans taken which was in excess of the interest charged on loans given by the assessee. Which means that in sum and substance he accepted the usage of interest bearing funds for earning interest income when he allowed that portion of interest expense which was in parity with the interest charged by the assessee on loans/advances given. Having accepted this fact therefore the AO was precluded from making any disallowance of interest u/s 57(iii) of the Act since the only requirement to be fulfilled for claiming expenses under the said section is that they must have been incurred wholly and exclusively for the purpose of earning income from other ....
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.... assessee is to earn income falling under the head „income from other sources‟. This contention of the assessee, however is devoid of substance, in view of the fact that the amount of interest paid by the assessee is higher than the amount of interest received. Had the primary motive of the assessee been to earn interest, no loss would have been possible on this account." 5.2. The Ld.CIT(A) has confirmed this finding of the Assessing Officer. 5.3. This basis of the Assessing Officer is completely devoid of any merits, what the section requires is that expenses must have been incurred for the purpose of earning income to be eligible to claim the same against the said income. There is no question of interpreting the term "income as profits". The moment expenditure has been incurred for earning income, the expenditure incurred for the same qualifies for deduction u/s. 54(iii) of the Act. In the present case, it is not disputed that the assessee has earned interest income of Rs. 1,08,39,837/-. Therefore, the Assessing Officer's finding that there is no income is factually incorrect and this basis of the Assessing Officer is, therefore, for denying the asse....
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....ccordingly allowed. ITA No.35/PUN/2025 (A.Y. 2019-20) 23. The grounds raised by the assessee are as under: 1. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) has erred in denying the appellant the carry forward of House Property loss amounting to Rs. 2,00,000/- without appreciating the facts of the case in the proper perspectives. Therefore, the appellant requests your honour to allow the loss under House Property. 2. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) has erred in restricting the allowability of interest expenditure only to the extent of Rs. 5,09,71,571/- and disallowing the balance interest of Rs. 41,77,229/- and resultantly making the addition of Rs. 35,92,229/- under the head Income from Other Sources without appreciating the facts of the case in the proper perspectives. 3. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) has erred in treating Agricultural income of Rs. 95,841/- as taxable Income without appreciating the facts of the case in the proper perspectives. 4. On the facts and circumsta....