Arvind Chhotalal Morzaria Vs ACIT (ITAT Mumbai)
Interest follows purpose, not label: ITAT allows deduction u/s 57(iii) for interest paid on housing loan used to earn interest income
Mumbai ITAT allowed assessee’s appeal & deleted disallowance of ₹30.90 lakh made by AO by denying deduction of interest u/s 57(iii). Assessee had acquired a property from own funds & subsequently raised a mortgage loan from Bank of Baroda, which was directly disbursed to a company, yielding taxable interest income. AO & CIT(A) treated the borrowing as a housing loan & restricted deduction only u/s 24(b).
Tribunal held that the decisive test is the purpose & utilization of borrowed funds & not the nomenclature of the loan. Since the borrowed funds were directly deployed to earn interest income & a clear nexus between interest paid & interest earned stood established, the expenditure was wholly & exclusively incurred for earning income & squarely allowable u/s 57(iii). Relying on Delhi HC ruling in CIT vs Taj International Jewellers, ITAT reiterated that where borrowing is made solely to earn income & such nexus is proved, interest deduction cannot be denied merely because the loan is secured on a house property. Accordingly, disallowance was deleted & appeal was allowed
