Shri Mahendra Singh Meel Vs. ITO (ITAT Jaipur)
The issue under consideration is whether the interest expense can be disallowed u/s 57(iii) on the ground that rate of interest paid was higher that rate of interest received in own case?
ITAT states that Section 57(iii) requires that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. S. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 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. Accordingly, when the interest expenditure was laid out by the assessee for earning the interest income, then the rate of interest for payment of interest is not relevant for the purpose of allowing the deduction under section 57(iii) of the Act. The authorities below have committed an error while disallowing the claim of interest on the ground that the payment in case of one party is at a higher rate than the interest earned by the assessee from such expenditure. The orders of the authorities below are accordingly set aside and claim of the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is directed against the order dated 17.10.2017 of CIT (Appeals)-2, Jaipur for the assessment year 2014-15. The assessee has raised the following grounds of appeal :-
“ 1. That the learned Authorities below have grossly erred in law and facts in passing the order which is bad in law and facts. Hence liable to be quashed.
2. That the learned Authorities below have grossly erred in law and facts in making/confirming disallowance of claim of interest expenses of Rs. 1,33,335/- on assumption and presumption basis. Hence the addition is liable to be deleted.
3. The appellant has reserved a right to add, amend or alter any ground or grounds of appeal on or before the appeal hearing.”
2. The assessee is an Individual and filed his return of income on 21st March, 2015 declaring total income of Rs. 6,89,140/- which includes income from house property, business and other sources. During the assessment proceedings, the AO noted that the assessee has shown interest income as well as interest payment. From the details, the AO noted that the assessee has received interest income at the maximum rate of 18% whereas in one of the payments of interest the assessee has paid the interest at 20%. Accordingly, the AO restricted the interest paid against the interest received by applying the rate at 18% instead of 20% paid by the assessee in respect of one party. The assessee challenged the action of the AO before the ld. CIT (A) but could not succeed.
3. Before the Tribunal, the ld. A/R of the assessee has submitted that when the assessee has paid the interest on the borrowed fund which has been used for earning the interest income, then the expenditure incurred by the assessee is wholly and exclusively for earning the interest income. Thus the deduction of interest paid is allowable under section 57(iii) of the Act. There is no provision under section 57 to restrict the claim of expenditure on the ground that the expenditure is more than the income. In support of his contention, he has relied upon the decision of Hon’ble Supreme Court in case of CIT vs. Rajendra Prasad Moody, 115 ITR 519 (SC) as well as the decision of Hon’ble Punjab & Haryana High Court in case of CIT vs. Pankaj Munjal Family Trust, 326 ITR 286 (P&H) and submitted that the Hon’ble Supreme Court has held that it is not necessary that any income should in fact have been earned as a result of the expenditure. The only requirement for allowing the deduction under section 57(iii) is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. Therefore, there is no such condition that the expenditure shall be deducted only if any income is made or earned. Thus the ld. A/R has submitted that the disallowance made by the AO and confirmed by the ld. CIT (A) is unjustified and not sustainable in law.
4. On the other hand, the ld. D/R has relied upon the orders of the authorities below and submitted that the AO has made the disallowance of interest only in respect of one transaction of payment of interest @ 20% whereas the assessee has earned the interest at the maximum rate of 18%. Thus the AO has restricted the payment of interest to 18%.
5. I have considered the rival submissions as well as the relevant material on record. The assessee has received interest income as well as paid interest expenditure, the details of which has been reproduced by the AO in the assessment order as under :-
