2025 (5) TMI 9 - AT - Income Tax

Addition u/s 57 - disallowance of interest expenses as assessee failed to prove the nexus between the funds borrowed and funds lent for the purpose of allowability of claim of deduction u/s 57 - Assessee submitted that interest was paid after due deduction of tax at source u/s 194 of the Act wherever applicable and the complete details of parties including their names addresses PAN amount borrowed and interest paid were duly submitted before the Tax Authorities HELD THAT - We observe that while passing the order the Ld. Assessing Officer and CIT(A) have not made any observations with regard to the alternate claim of the assessee that interest was allowable u/s 36(1)(iii) of the Act. The only basis / reason for rejecting the claim of interest under Section 57 of the Act is that the assessee was not able to prove the nexus between the interest paid on amounts taken and the interest earned by the assessee. It is a well settled law that in case the assessee has made any error in filing the return of income it would be open for him to revise the same or filed revised computation before Appellate Authorities. A legitimate claim of deduction cannot be denied to the assessee only on the ground that the same was not claimed in the return of income. In our considered view in all fairness in the interest of justice the matter may be restored to the file of AO to verify the genuineness of the claim of the assessee whether the interest was taken for the purpose of business and whether such claim is allowable under Section 36(1)(iii) of the Act. The assessee has claimed that it has given complete details of parties to whom interest was paid and such loans were taken for the purpose of it s construction business (in the name and style of M/s. Yashvi Construction). The Assessing Officer is accordingly directed to verify the assessee s claim of deduction under Sectio 36(1)(iii) of the Act with respect to interest expenditure. Appeal of the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the addition of Rs. 69,36,456/- made by the Assessing Officer under Section 57 of the Income Tax Act, 1961, on account of disallowance of interest expenses claimed against interest income, was justified in the absence of proof of nexus between borrowed funds and interest income earned;

(b) Whether the assessee's claim that a portion of the interest expenses (Rs. 59,25,359/-) was wrongly claimed under Section 57 instead of Section 36(1)(iii) of the Act as business expenditure, supported by maintenance of two sets of books of accounts, was rightly disregarded by the lower authorities;

(c) Whether the assessee's revised computation of income submitted during assessment proceedings without filing a revised tax audit report or revised return of income was permissible and should be considered for allowing the deduction;

(d) The applicability of principles of natural justice and equity in the context of the impugned order passed without considering material placed on record by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Justification for addition under Section 57 due to lack of nexus proof

Relevant legal framework and precedents: Section 57 of the Income Tax Act permits deduction of expenses incurred for earning income under the head "Income from Other Sources." The burden lies on the assessee to establish that the expenditure claimed is wholly and exclusively for earning such income. The Assessing Officer must be satisfied about the nexus between the expenditure and the income.

Court's interpretation and reasoning: The Assessing Officer disallowed the entire interest expense of Rs. 69,36,456/- claimed under Section 57 on the ground that the assessee failed to prove the nexus between the interest paid on borrowed funds and the interest income earned. The Assessing Officer also noted that the assessee did not provide any new explanation upon issuance of a show cause notice and relied on the original submissions only.

Key evidence and findings: The assessee earned interest income of Rs. 52,893/- and claimed interest expenses of Rs. 69,36,456/-. The Assessing Officer found the claim disproportionate and unsubstantiated due to absence of proof linking borrowed funds to interest income.

Application of law to facts: The Assessing Officer applied Section 57 strictly, requiring proof of nexus, which the assessee failed to provide to his satisfaction. Consequently, the addition was made.

Treatment of competing arguments: The assessee argued that the interest expenses were incurred for earning interest income and submitted details of loans and interest payments, but the Assessing Officer found the evidence insufficient. The CIT(A) upheld this view.

Conclusions: The Tribunal noted that while the Assessing Officer and CIT(A) focused on disallowing the claim under Section 57, they did not consider the alternate claim under Section 36(1)(iii).

Issue (b): Validity of assessee's claim that interest expenses should be allowed under Section 36(1)(iii) as business expenditure

Relevant legal framework and precedents: Section 36(1)(iii) allows deduction of interest on borrowed capital used for business or profession. It is a recognized principle that expenses incurred wholly and exclusively for business purposes are deductible under this provision.

Court's interpretation and reasoning: The assessee maintained two sets of books: one for the proprietary construction business and another personal account. The interest expenses of Rs. 59,25,359/- related to the business were wrongly claimed under Section 57 instead of Section 36(1)(iii). The Tribunal observed that the lower authorities did not address this alternate claim and failed to verify the genuineness of the business purpose of the interest expenditure.

Key evidence and findings: The assessee submitted detailed charts showing parties, PANs, amounts borrowed, interest paid, and compliance with TDS provisions under Section 194. The assessee also claimed that loans were taken for the construction business and separate books were maintained.

Application of law to facts: The Tribunal emphasized that a legitimate claim of deduction cannot be denied merely because it was not claimed correctly in the return. The assessee's right to revise computation and claim deduction under the correct head was acknowledged.

Treatment of competing arguments: The Assessing Officer and CIT(A) did not consider this alternate claim, focusing solely on disallowance under Section 57. The assessee's contention that the interest was business-related was not examined substantively.

Conclusions: The Tribunal directed restoration of the matter to the Assessing Officer for verification of the claim under Section 36(1)(iii), including genuineness of interest expenses and their linkage to the business.

Issue (c): Permissibility of revised computation of income without revised tax audit report or return

Relevant legal framework and precedents: It is a settled legal position that an assessee can revise computation of income at any stage before final disposal and claim legitimate deductions. The absence of a revised tax audit report or revised return does not automatically preclude consideration of the revised claim, especially when the claim is genuine and supported by evidence.

Court's interpretation and reasoning: The Assessing Officer rejected the revised computation on the ground that it was not accompanied by a revised tax audit report or return. The Tribunal disagreed with this approach, holding that legitimate claims cannot be denied on procedural grounds alone.

Key evidence and findings: The assessee submitted revised computation during assessment proceedings and provided detailed evidence supporting the claim.

Application of law to facts: The Tribunal held that the assessee's revised claim deserved consideration in the interest of justice and equity.

Treatment of competing arguments: The Assessing Officer relied on procedural non-compliance to reject the claim, while the assessee emphasized substantive correctness and bona fide nature of the claim.

Conclusions: The Tribunal ruled that the Assessing Officer should consider the revised claim on merit after verification.

Issue (d): Alleged violation of principles of natural justice and equity

Relevant legal framework and precedents: Principles of natural justice require that an assessee be given a fair opportunity to present evidence and that material placed on record be duly considered before passing an order.

Court's interpretation and reasoning: The assessee contended that the impugned order was passed without considering material already on record, violating natural justice. The Tribunal noted that the lower authorities did not examine the alternate claim or the detailed evidence submitted.

Key evidence and findings: The assessee had submitted detailed evidence regarding loans, interest payments, and business purpose of funds.

Application of law to facts: The Tribunal found merit in the contention that the matter was not fully considered and directed reassessment to ensure proper examination.

Treatment of competing arguments: The Revenue relied on procedural grounds and absence of nexus proof; the assessee emphasized substantive evidence and right to be heard.

Conclusions: The Tribunal held that to uphold natural justice and equity, the matter must be reconsidered by the Assessing Officer.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following principles and conclusions:

"It is a well settled law that in case the assessee has made any error in filing the return of income, it would be open for him to revise the same or file revised computation before Appellate Authorities. A legitimate claim of deduction cannot be denied to the assessee, only on the ground that the same was not claimed in the return of income."

"The Assessing Officer is accordingly directed to verify the assessee's claim of deduction under Section 36(1)(iii) of the Act with respect to interest expenditure. Accordingly, the Assessing Officer is directed to verify whether assessee is correct in claiming that the interest bearing funds on which interest to the tune of Rs. 59,25,359/- has been paid, were in fact used for the purpose of its construction business, for which the assessee is claiming to have maintained separate books of accounts."

"The Assessing Officer is also directed to verify whether the assessee is able to establish the nexus between interest bearing funds and how the same have been utilized for earning interest income in terms of Section 57 of the Act."

"In all fairness, in the interest of justice, the matter may be restored to the file of Assessing Officer to verify the genuineness of the claim of the assessee whether the interest was taken for the purpose of business and whether such claim is allowable under Section 36(1)(iii) of the Act."

Final determination was to set aside the impugned orders and restore the matter to the Assessing Officer for fresh verification and adjudication in accordance with law, ensuring due consideration of the assessee's alternate claim and evidence.