TaxTMI 
TaxTMI 
2026 (4) TMI 1484
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....rief facts of the case: During the year, the assessee was engaged in the business of real estate and had filed its return of income in ITR 6 for AY 2018-19 on 25/09/2018, at a total income of Rs. 1,15,71,030/- under normal provisions of the I.T. Act and of Rs. 1,15,71,033/- u/s. 115JB of the Act. In the return of income filed, the AO noted that the assessee had admitted Nil income under 'Gross receipts from Business' and a Net Profit of Rs. (-) 3,62,362/- was shown. Further, the AO noted that the assessee admitted gross income of Rs. 3,58,05,065/- under the head 'Other Sources and had claimed expenses / deduction amounting Rs. 2,38,71,670/-, and the remaining amounting to Rs. 1,19,33,395/- (Rs. 35805065/- (-) Rs. 23871670/-) was shown under 'Income from other sources'. The AO also noted that during the year the assessee had set-off the current year business loss of Rs. 3,62,362/- against the income of Rs. 1,19,33,395/- under the head 'Other Sources'. 2.1 The case was selected for complete scrutiny to examine the income from real estate with the underlying rationale that the "assessee is running real estate business and disclosing high closing stock as....
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.... be chargeable to tax under the head "Income from Other Sources". The AO also noted that while delivering this judgment, the Hon'ble Apex Court affirmed the decision of the Hon'ble High Court of Madras in the case of Commissioner of Income Tax V. Seshasayee Paper and Board Ltd., (156 ITR 543) that interest earned by the assessee on investment in share capital in call deposits even before the production commenced could be assessed separately under the head "Other Sources". 2.6 The AO, in view of the above discussion, was of the view that the assessee's claim of deduction u/s 57(3) of the Act amounting to Rs. 2,38,71,670/- was liable to be disallowed, and allowed the assessee to capitalise entire interest expenditure of Rs. 5,67,80,588/-. The AO in this regard, issued a show-cause notice on 11.04.2021 to the assessee. In response, the assessee furnished a reply on 13.04.2021 and relied upon the decision of the Hon'ble Delhi High Court in the case of Vodafone South Ltd. (formerly known as M/s Vodafone South Essar & Hutchison Essar South Ltd. ) vs. CIT in appeal no. 334 & 336 of 214 and submitted that the facts in the present case were distinguishable from the decision in Tu....
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....part of the loan amount raised from M/s India bulls Financial Services Ltd. for repayment of loan earlier raised for purchase of land, part of the loan amount was either parked in FDRs or further advanced as interest bearing loan to various parties from whom interest income has been earned to reduce interest cost, this fact is evident from the financials placed at Page-12 to25 of the Paper Book and computation of income placed at Page-11 of the Paper Book, wherein, it will be observed that interest income of Rs. 1,19,33,395/- net of interest paid has been offered to tax. The appellant further submitted that during the year, the gross interest income is Rs. 3,58,05,065/-i.e. on loans Rs. 3,57,39,987/- and on FDRs Rs. 65,078/- made from borrowings against which interest expense having direct nexus amounts to Rs. 2,38,71,670/- and the same was claimed as deduction u/s. 57(iii) of the Act, leaving a balance interest income of Rs. 1,19,33,395/- which was offered to tax. Considering the facts of the case, I am inclined to agree with the appellant's contentions. The Hon'ble Delhi High Court in the case of Vodaphone South Ltd. Vs. CIT [2015] 61 taxmann.com 415 (Delhi) considered a ....
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....to as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business. (ii) The expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. In other words, if it is such expenditure as a prudent businessman would incur for the purpose of business. (iii) Once it is established that there was nexus between the expenditure and the purpose of the business, not necessarily the business of the assessee itself, the revenue cannot put itself in the armchair of the businessman and decide how much of the expenditure is reasonable having regard to the circumstances of the case. (iv) Wherein the pre-operative phase the surplus funds borrowed for the purpose of business are kept by an assessee in fixed deposits, the interest earned thereon would be 'income from other sources'. The interest paid on the loan borrowed would not be permitted to be netted against such interest income in the preoperative phase. [Para 20] * The revenue was under a basic misconception that the assessee was using a part of....
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....l before us on the following grounds of appeal: 1. "Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the disallowance of 2,38,71,670/-made by the Assessing Officer under Section 57(iii) of the Income-tax Act, 1961 by not appreciating the facts that the assessee had not established a direct nexus between the interest expenditure claimed under Section 57(iii) and the interest income earned, which is a mandatory condition for claiming such deduction? 2. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing the deduction under Section 57(iii) despite clear findings by the Assessing Officer that the borrowed funds were partly utilized for capital purposes (purchase of land) and hence the expenditure was not incurred wholly and exclusively for earning interest income? 3. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in not appreciating the facts that in absence of any business activity during the year and considering that land inventory increased only due to capitalization of interest, the assessee was in pre operative stage, and hence, entire interest expendi....
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....ncome 2,38,71,670 vii. Total interest income earned 3,58,05,065 5. The assessee has earned total interest income of Rs. 3,58,05,065/- from Loan advanced and FDR against which the assessee has claimed interest expenses of Rs. 2,38,71,670/- thereby offering net interest income of Rs. 1,19,33,395/-to tax. 6. From the above facts, it is apparent that the part of interest-bearing funds were utilized for advancing loans and creating FDR and as such there is direct and intimate nexus between the interest expense and interest income so earned thus fully justifying the claim u/s 57(ii) of the Act. 7. The Ld. CIT(A) after taking into consideration the above facts and based on the decision of Hon'ble Delhi High Court in the case of Vodafone South Ltd. v. CIT [2015] 61 taxmann.com 415 (Delhi), has rightly deleted the disallowance and as such the order of the CIT(A) may kindly be upheld. 8. It is further clarified that the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172(SC) as referred by the Assessing officer is not relevant." 7. We have heard both the parties and perused the....