Facts of the Case

The assessee filed the return of income for AY 2016–17. During assessment proceedings under section 143(3) of the Income Tax Act, the Assessing Officer disallowed interest expenditure of ₹61,97,072 claimed by the assessee under section 57(iii).

The assessee had paid interest to Dewan Housing Finance Corporation Ltd. (DHFL) on borrowed funds and claimed that the same was allowable as deduction against the interest income received from Urbainia Spaces Pvt. Ltd.

However, the Assessing Officer held that the assessee failed to establish a direct nexus between the borrowed funds and the interest income earned. Accordingly, the interest expenditure was disallowed.

The CIT(A), National Faceless Appeal Centre (NFAC) upheld the disallowance. Aggrieved by the order, the assessee filed an appeal before the ITAT Delhi.

Issues Involved

  1. Whether the interest expenditure claimed under section 57(iii) is allowable when the assessee fails to establish a nexus between the borrowed funds and the interest income earned.
  2. Whether the disallowance of interest expenditure of ₹61,97,072 by the Assessing Officer and confirmed by the CIT(A) was justified.
  3. Whether the matter should be restored to the Assessing Officer to allow the assessee an opportunity to establish the nexus.

Petitioner’s Arguments

  • The assessee challenged the order of the CIT(A), NFAC, which confirmed the addition of ₹61,97,072 to the returned income.
  • It was argued that the authorities erred in concluding that the assessee failed to prove the nexus between the borrowed funds and the interest-bearing advances.
  • The assessee contended that the interest expenditure should be allowed against the interest income earned.
  • The assessee also contended that adequate opportunity was not provided to substantiate the claim with supporting evidence.

Respondent’s Arguments

  • The onus lies on the assessee to prove the eligibility of deduction under section 57(iii).
  • The assessee failed to establish the live nexus between the borrowed funds and the interest income earned.
  • Therefore, the Assessing Officer and CIT(A) were justified in disallowing the interest expenditure.

 

Court Findings

The ITAT observed that the core issue in dispute is the existence of a live nexus between the interest expenditure and the interest income.

The Tribunal noted that the assessee must substantiate the claim by producing supporting evidence demonstrating that the borrowed funds were used for earning the interest income.

Considering the circumstances and in the interest of justice, the Tribunal deemed it appropriate to restore the matter to the Assessing Officer so that the assessee may produce necessary evidence.

The Tribunal also directed that the assessee must plead and prove the case within three effective opportunities during the consequential proceedings.

 

Court Order

The ITAT restored the issue to the Assessing Officer for fresh examination to determine the nexus between the interest expenditure and the interest income.

The assessee was granted an opportunity to furnish supporting evidence.

Accordingly, the appeal of the assessee was allowed for statistical purposes.

Important Clarification

  • Deduction under section 57(iii) is allowable only when the assessee establishes a clear nexus between the expenditure incurred and the income earned.
  • The burden of proof lies on the assessee to demonstrate that the borrowed funds were actually used for generating the income.
  • If such nexus is not established, the deduction may be disallowed.
  • However, courts may restore the matter for fresh examination if proper opportunity was not effectively utilized or evidence requires reconsideration.

Link to download the order -  https://itat.gov.in/public/files/upload/1735624307-YY4wy5-1-TO.pdf

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