Nishit Kantilal Savla Vs DCIT (ITAT Mumbai)
Interest Paid to Partnership Firm Allowable Against Interest Income – ITAT Mumbai Allows Deduction u/s 57(iii)
Assessee, an individual & partner in M/s Savla Associates and M/s Sadgurukrupa Developers, declared total interest income of ₹44.27 lakh – comprising ₹18.65 lakh from loans & advances and ₹25.61 lakh interest on partner’s capital from Sadgurukrupa Developers. Against this, he claimed deduction of ₹76.06 lakh interest paid to Savla Associates @9% p.a., under Section 57(iii).
AO disallowed the claim holding that the borrowed funds from Savla Associates were utilized for investment in shares, from which no income was earned during the year,& thus, the nexus between borrowing and income was not established. CIT(A) confirmed the disallowance, observing that since borrowed funds were invested in shares and other assets, interest was not allowable against income from other sources or business income.
Before the ITAT, Assessee argued that the borrowed funds were part of partner’s capital movements & were utilized for income-yielding purposes; hence, the interest was a legitimate expenditure incurred to earn taxable income. The Bench examined the balance sheet and found that the assessee had sufficient own funds, loans, and capital accounts with firms. It held that it was unjustified to presume that all borrowed funds were used for non-income-yielding investments.
