Case Law Details
Ankit Ashok Savla Vs ITO (ITAT Ahmedabad)
Introduction: In the landmark case of Ankit Ashok Savla Vs ITO, ITAT Ahmedabad clarified the non-disallowance of interest expenses incurred for earning income from loans and advances under Section 57 of the Income Tax Act. This decision shines a light on how these expenses are treated in the computation of taxable income, establishing an important precedent.
Analysis: The appellant, Ankit Ashok Savla, filed an appeal against the order of the CIT(Appeals) which confirmed the disallowance of Interest Expenditure of Rs.9,15,074/- under section 57 of the Act. The appellant argued that the Assessing Officer and the CIT(A) failed to properly consider that the interest expenses were incurred for the purpose of earning income from various parties, advances, and partnership firms, and thus should not be disallowed.
ITAT Ahmedabad, after considering the arguments presented by both parties, held that the Assessing Officer and the CIT(A) were unjustified in their disallowance of interest expenses. The tribunal held that the Assessing Officer cannot dictate the appellant about the loans and advances given to other parties and the interest charged thereon, especially given the appellant’s status as a partner in a partnership firm.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The appeal filed by the assessee is against the order passed by the Ld. CIT(Appeals), National Faceless Appeal Centre (in short “NFAC”), Delhi on 07.12.2022 for A.Y. 2017-18.
2. The grounds of appeal raised by the assessee are as under:
“1. That the learned Assessing Officer (AO) has erred in law and facts by issuing notice issued under section 143(2) of the Act and all subsequent assessment proceedings and therefore the order passed by the learned AO is required to be quashed and the learned AO is to be directed to accept the returned income.
2. That the learned National Faceless Appeal Centre (NFAC), has erred in law and facts by confirming the disallowance of Interest Expenditure of Rs.9,15,074/-under section 57 of the Act, on the ground that the assessee has claimed excess deduction and not having business income, therefore the learned AO should be directed to allow entire interest expense, while computing the total income under the correct head of income.
3. That your appellant craves a leave to add, alter or amend any grounds at the time of hearing.”
3. The assessee filed his return of income for A.Y. 2017-18 showing total income of Rs. 22,61,460/- on 14.03.2018. The case was selected for scrutiny assessment and a notice under Section 143(2) of the Act was issued on 09.08.2018 for the limited purpose to the extent that capital gain / loss on sale of property and deduction against income from other sources. The assessee was duly served to the statutory notices and the assessee filed details and other documents from time to time. The Assessing Officer observed that the assessee firm has given advances to three persons / entities during the year under consideration at the interest rate of 8.87%, 10.21% and 8.09%. Further, the Assessing Officer observed that assessee firm has received unsecured loan from the 14 entities / persons wherein the average rate of interest comes around 10 to 12%. The assessee has collected interest at 8.9 to 10% on loans and advances given. However, the assessee has paid interest at 12% on the unsecured loan received. The assessee claimed deduction under Section 57 of the Act as the assessee has no business income. The Assessing Officer observed that the assessee has claimed excess deduction under Section 57 of the Act and therefore, disallowed interest expenses to the extent of Rs. 9,15,074/-.
4. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) dismiss the appeal of the assessee.
5. The Ld. A.R. submitted that Ground No. 1 is not pressed. Hence, the Ground No. 1 is dismissed. As regards, Ground No. 2 related to disallowance of interest expenses the Ld. A.R. submitted that the Assessing Officer as well as the CIT(A) has not properly considered the submissions dated 11.12.2019, wherein the assessee has stated that interest expenses of Rs. 42,78,115/- is for the purpose of earning of income from interest from various party / advances / deposits and partnership firm and ultimately there is net interest income of Rs. 3,07,993/- and there is no question of any disallowance of any interest expenses. While disallowing the expenses the amount of interest income from partnership firm (where the assessee is a partner) of Rs. 14,26,198/- which as per Section 28(v) of the Act was offered as income from business has not been considered and only interest income and interest expenses shown under the head from other sources have been considered and the remaining amount of Rs. 9,15,074/- was disallowed. The Ld. A.R. submitted that a mere claim of entire interest expenses under the head income from the other sources cannot be basis for the disallowance under Section 57 of the Act, though, there is interest income from the partnership firm of Rs. 14,26,198/-. The interest expenses is for earning of income and mere claim of entire interest expenses under the head income from other sources cannot be basis for the disallowance under Section 57(iii) of the Act. Alternatively, the Ld. A.R. submitted that if the amount of interest is not allowable under Section 57 of the Act, the amount is to be allowed under Section 36(1)(iii) of the Act, as the Assessing Officer is bound to determine the correct income as per law and in this regard, the Ld. A.R. relied upon the Article 265 of the Constitution of India and CBDT Circular on Assessee Rights. The Ld. A.R. also relied upon the decision of Hon’ble Gujarat High Court in case of Addl. CIT vs. Laxmi Agents Pvt. Ltd. (115 ITR 227) (Guj.). The Ld. A.R. further submitted that no part of income was required to be disallowed and therefore, the Assessing Officer should be directed to allow the said interest amount of Rs. 9,15,074/- either under Section 57(iii) or Section 36(i)(iii) of the Act.
6. The Ld. D.R. submitted that the nexus of fund of borrowed and the loan given was not established by the assessee before any of the Revenue authorities. The Ld. D.R. relied upon the assessment order and the order of the CIT(A).
7. Heard both the parties and perused all the relevant material available on record. It is a matter of fact that the assessee has claimed interest of 8.9% to 10% on loans and advances given. The Assessing Officer cannot dictate the assessee about the loan and advances given to the other parties and the interest thereon charged by the assessee as the assessee is a partner in the partnership firm. The observation of the Assessing Officer as well as the CIT(A) that assessee did not have any business income appears to be not in consonance of the portfolio of the assessee. The assessee within his business exigencies has paid higher interest on unsecured loans as the need in respect of partnership firm for its fund is required. Therefore, interest expenses disallowed by the Assessing Officer and confirmed by the CTI(A) was not justifiable. Hence, the Ground No. 2 is allowed.
8. In result, the appeal of the assessee is partly allowed.
This Order pronounced in Open Court on 17/05/2023
