2025 (7) TMI 122 - AT - Income Tax

New claim in proceedings u/s 153A as not claimed in his regular return of income - Denial being interest paid on borrowed capital for house property - AO disallowed the same on the ground that the assessee did not furnish the details such as proof of payment of interest for housing loan taken for purchase of self occupied house property copy of loan account statement and the certificate from the bank regarding the payment of interest and principal - HELD THAT - 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. 2020 (2) TMI 307 - BOMBAY HIGH COURT 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 proper to restore the issue to the file of the Assessing Officer with a direction to grant one final opportunity to the assessee to substantiate his claim of interest expenditure of Rs. 2 lakh on account of borrowed capital for self occupied house property and decide the issue as per fact and law. We hold and direct accordingly. The first issue raised by the assessee is accordingly allowed for statistical purposes. Disallowance of interest - HELD THAT - As relying on Shri Girishbhai Vadilal Shah 2024 (3) TMI 771 - ITAT AHMEDABAD and Darashaw Co. Pvt. Ltd. 2014 (5) TMI 940 - BOMBAY HIGH COURT AO was not justified in disallowing the claim of interest expenditure and Ld. CIT(A) was not justified in confirming the same. We therefore set aside the order of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance. The second issue raised by the assessee in the grounds of appeal is accordingly allowed. Treating agricultural income as taxable income - as per AO assessee did not furnish the supporting documents to prove that the agricultural activity was being carried out by him for earning the agricultural income - HELD THAT - It is the submission of the Ld. Counsel for the assessee that given an opportunity the assessee is in a position to substantiate his claim by filing the requisite details before the AO since the case was not handled properly before the AOas well as the Ld. CIT(A). Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the AO with a direction to grant one final opportunity to the assessee to substantiate his claim by filing the requisite details and decide the issue as per fact and law. We hold and direct accordingly. Ground No.3 raised by the assessee is accordingly allowed for statistical purposes. Disallowance of deduction under Chapter VI-A - HELD THAT - CIT(A) confirmed the action of the AO on the ground that the assessee failed to furnish the details of medical insurance premium LIC policy and repayment of principal amount of housing loan. It is the submission of the assessee that given an opportunity the assessee is in a position to substantiate his claim by filing the requisite details before the AO. We deem it proper to restore the issue to the file of the Assessing Officer with a direction to grant one final opportunity to the assessee to substantiate his claim by filing the requisite details and decide the issue as per fact and law.

Summary

The appeals concern the assessment years 2018-19 and 2019-20 and raise core legal questions regarding the allowability of deductions claimed by the assessee under the Income Tax Act, 1961, specifically under sections 24(b), 57(iii), and 36(1)(iii), as well as issues relating to the treatment of agricultural income and deductions under Chapter VI-A. The principal issues considered are:

1. Whether the assessee is entitled to claim deduction of Rs. 2,00,000/- as interest paid on housing loan for self-occupied house property, particularly when such claim was made in a return filed under section 153A subsequent to a search and seizure action.

2. Whether the Assessing Officer and Commissioner of Income Tax (Appeals) were justified in disallowing a portion of the interest expenditure claimed by the assessee (Rs. 1,43,29,828/- for AY 2018-19 and Rs. 41,77,229/- for AY 2019-20) on the ground that the interest paid exceeded the interest income earned, and whether such disallowance aligns with the provisions of section 57(iii) and relevant judicial precedents.

3. Whether the interest income and commission income received by the assessee should be treated as business income or income from other sources.

4. Whether the agricultural income claimed by the assessee is rightly excluded from exemption due to lack of evidence.

5. Whether the deduction claimed under Chapter VI-A (Rs. 1,75,000/-) is allowable in absence of supporting evidence.

Issue-wise Detailed Analysis:

1. Deduction of Interest on Housing Loan for Self-Occupied House Property

Legal Framework and Precedents: Section 24(b) of the Income Tax Act allows deduction of interest on borrowed capital for acquisition or construction of self-occupied house property. Section 153A permits filing of returns in search cases, and the question arises whether fresh claims can be made in such returns. The Hon'ble Bombay High Court in PCIT vs. JSW Steel Ltd. (270 Taxman 201) held that in abated assessments, fresh claims can be made in returns filed under section 153A.

Court's Interpretation and Reasoning: The Assessing Officer disallowed the deduction on two grounds: lack of documentary evidence to prove payment of interest and the claim being made only in the return filed under section 153A, not in the original return. The CIT(A) accepted the legal position that fresh claims can be made in abated assessments under section 153A but upheld disallowance due to absence of supporting evidence.

Key Evidence and Findings: The assessee failed to furnish proof such as loan account statements or bank certificates evidencing payment of interest on housing loan.

Application of Law to Facts: The Tribunal agreed with the CIT(A) that the legal principle allowing fresh claims in abated assessments applies but emphasized the necessity of documentary proof. However, considering the interest of justice and the assessee's submission to furnish evidence, the Tribunal restored the issue to the Assessing Officer for fresh adjudication with a direction to grant a final opportunity to the assessee to substantiate the claim.

Treatment of Competing Arguments: The Revenue did not appeal against the principle allowing fresh claims under section 153A but relied on lack of evidence. The assessee sought opportunity to produce evidence.

Conclusion: The disallowance of Rs. 2,00,000/- interest deduction was set aside for statistical purposes, and the matter was remanded for fresh consideration after allowing the assessee to produce evidence.

2. Disallowance of Interest Expenditure under Section 57(iii)

Legal Framework and Precedents: Section 57(iii) permits deduction of expenditure (not capital in nature) wholly and exclusively laid out for the purpose of making or earning income chargeable under the head "Income from Other Sources." The key legal question is whether the deduction can be disallowed merely because the interest expenditure exceeds the interest income or because no actual income was earned in the year.

Relevant precedents include the Hon'ble Supreme Court decision in CIT vs. Rajendra Prasad Moody (1978) 115 ITR 519, which held that the expenditure must be incurred for the purpose of earning income but it is not necessary that income must actually be earned in the relevant year. Other decisions cited include CIT vs. Darashaw & Co. Pvt. Ltd. and various ITAT decisions affirming that the purpose of expenditure is the test, not the actual earning of income.

Court's Interpretation and Reasoning: The Assessing Officer disallowed the portion of interest expenditure exceeding the interest income, reasoning that the assessee had diverted borrowed funds to firms whose income was exempt or from which no income was received, and thus the entire interest paid was not wholly and exclusively for earning income. The CIT(A) upheld this disallowance, emphasizing lack of substantiation and nexus between funds borrowed and income earned.

The Tribunal, after considering the submissions and judicial precedents, rejected the Assessing Officer's and CIT(A)'s reasoning. It held that the primary test under section 57(iii) is the purpose for which the expenditure is incurred, not whether income is actually earned. The Tribunal relied on the Supreme Court's authoritative pronouncement that the expenditure need not result in income in the same year to qualify for deduction. It also noted that the assessee had demonstrated the nexus between borrowed funds and loans advanced to related concerns on which interest income was earned, and that the Assessing Officer had not disproved this nexus.

Key Evidence and Findings: The assessee furnished bank statements and ledger accounts showing that borrowed funds were advanced as loans to related parties at interest rates equal or lower than those on borrowed funds. The Assessing Officer did not establish that the funds were used for personal purposes or that the interest payments were bogus.

Application of Law to Facts: Applying the legal principle that expenditure wholly and exclusively for the purpose of earning income is deductible regardless of actual income earned, the Tribunal held that the disallowance was unjustified. It further observed that the Assessing Officer's partial acceptance of interest expenditure negated the premise that no income was earned.

Treatment of Competing Arguments: The Revenue argued that the assessee's failure to earn income on certain investments justified disallowance. The assessee contended that the purpose of incurring interest was to earn income and that actual income in the year was not a prerequisite. The Tribunal sided with the assessee's interpretation, supported by binding Supreme Court authority.

Conclusion: The Tribunal set aside the disallowance of Rs. 1,43,29,828/- (and similarly Rs. 41,77,229/- for AY 2019-20) and directed the Assessing Officer to delete the disallowance, allowing the full interest expenditure claimed under section 57(iii).

3. Treatment of Interest and Commission Income as Business Income or Income from Other Sources

The Assessing Officer and CIT(A) treated the interest and commission income as income from other sources. The assessee contended that such income should be treated as business income. The Tribunal did not find merit in the assessee's contention, noting that interest received from companies in which the assessee is a shareholder does not fall within the definition of business income under section 28(v). This position was upheld without detailed elaboration, indicating acceptance of the Revenue's classification.

4. Agricultural Income

The Assessing Officer disallowed the claim of agricultural income of Rs. 95,841/- due to lack of supporting evidence proving agricultural activity. The CIT(A) upheld the disallowance. The assessee sought opportunity to furnish evidence. The Tribunal restored the issue to the Assessing Officer for fresh adjudication with directions to grant a final opportunity to the assessee to substantiate the claim.

5. Deduction under Chapter VI-A

The Assessing Officer disallowed deduction of Rs. 1,75,000/- under Chapter VI-A for lack of supporting documents such as medical insurance premium receipts, LIC policy details, and principal repayment of housing loan. The CIT(A) confirmed the disallowance. The assessee sought opportunity to produce evidence. The Tribunal restored the issue to the Assessing Officer for fresh adjudication with directions to grant a final opportunity to the assessee.

Significant Holdings:

"It is not necessary that the expenditure must have been obligatory; it is enough to show that the money was expended not necessarily 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... The natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure... The section does not require that the expenditure shall be deductible only if any income is made or earned."

"The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income."

"The Assessing Officer was not justified in disallowing the claim of interest expenditure... The requirements for claiming deduction u/s 57(iii) of the income tax act, 1961 are fulfilled and therefore assessee's claim of interest... 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."

"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."

Core Principles Established:

- Fresh claims can be made in returns filed under section 153A in abated assessments.

- Deduction under section 57(iii) depends on the purpose of expenditure being wholly and exclusively for earning income from other sources, not on actual income being earned in the year.

- The nexus between borrowed funds and income-earning use must be demonstrated, but absence of income does not preclude deduction if the purpose is established.

- Interest and commission income from related companies is income from other sources, not business income.

- Proper substantiation is necessary for claims of agricultural income and deductions under Chapter VI-A.

Final Determinations:

- The claim of Rs. 2,00,000/- interest on housing loan was restored to the Assessing Officer for fresh adjudication with opportunity to produce evidence.

- The disallowance of Rs. 1,43,29,828/- (and Rs. 41,77,229/- for AY 2019-20) on account of interest expenditure was set aside, and the full claim under section 57(iii) allowed.

- The classification of interest and commission income as income from other sources was upheld.

- The claims relating to agricultural income and Chapter VI-A deductions were restored to the Assessing Officer for fresh consideration with directions to grant final opportunity to the assessee.

- The appeals were partly allowed for statistical purposes, with remand for fresh adjudication on certain issues.