Ravi Kumar Gollapudi Vs DCIT (ITAT Hyderabad)
Interest Paid Today, Interest Received Tomorrow: Cash System u/s 145(1) Cannot Defeat Deduction u/s 57(iii), but Nexus Must Pass the Test—Hyderabad ITAT Remands ₹13.66 Lakh Disallowance
The controversy
The Hyderabad Bench of the ITAT examined whether interest expenditure incurred on borrowed funds could be disallowed merely because the interest actually received during the year was lower than the interest paid. The assessee contended that he regularly followed the cash system of accounting & had received the balance interest in subsequent years.
The Tribunal held that recognition of interest income on actual receipt basis is permissible u/s 145(1). Therefore, a mismatch between interest paid & interest received in a particular year cannot, by itself, justify complete disallowance. However, deduction u/s 57(iii) would be available only after establishing a direct nexus between the borrowed funds, the interest-bearing advance & the corresponding income offered to tax.
Interest expenditure against income from other sources
The assessee, Shri Ravi Kumar Gollapudi, filed his return for AY 2018-19 declaring a total income of ₹30,33,940. His case was selected for limited scrutiny & notice u/s 143(2) was issued.
During assessment proceedings, the AO noticed that the assessee had claimed interest expenditure of ₹65,47,089 against interest income of ₹58,81,505 offered under the head “Income from other sources.” In the preceding year, the assessee had reported interest income of ₹65,26,481, while the interest expenditure was ₹65,66,814.
