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2024 (3) TMI 771 - ITAT AHMEDABADDisallowance of claim of interest expenses u/s. 57(iii) - assessee has returned the loss under the head “income from other sources” - AO noted that while the assessee had charged interest @12%, the same had been advanced by charging lower rate of interest, i.e. ranging from 6% to 10% and the difference accordingly was worked out and was disallowed in terms of section 57(iii) - HELD THAT:- 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) 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 sources. What is relevant therefore is only the nexus of expenditure for earning income and the quantum of expenditure incurred therefore is of no consequence. For allowability of expenses under the said section, the nexus of the expenditure with the earning of income is essential conditions to be fulfilled. Clearly the disallowance made u/s. 57(iii) is contrary to law as interpreted by the Revenue authorities themselves. Revenue authorities have also misinterpreted the provision of section 57(iii) of the Act by stating that expenses under the section can be allowed only if income is earned from the incurrence of the said expense, and the term income means profit earned. The Revenue authorities have made the disallowance in the present case noting that assessee had made losses and therefore as earned no income. 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) - In the present case, it is not disputed that the assessee has earned interest income - Therefore, the AO’s finding that there is no income is factually incorrect and this basis of the AO is, therefore, for denying the assessee’s claim of expenditure u/s. 57(iii) of the Act is liable to be quashed. We find that the AO has dismissed this contention of the assessee stating that there ought to be a clear nexus between the expenditure incurred and the income earned as observed in SETH R. DALMIA VERSUS COMMISSIONER OF INCOME-TAX, DELHI [1977 (9) TMI 1 - SUPREME COURT]. AO has not stated as to how in the light of the facts stated by the assessee, the nexus was not established, he has just summarily dismissed the contention of the assessee. In the absence of the AO pointing out as to how despite the assessee’s explanation, there was no nexus between the interest bearing-funds and their utilization for making advances for earning interest income, no disallowance u/s. 57(iii) of the Act was tenable. Assessee appeal allowed.
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