ITO v. Bipin Vidyadhar Chobhe

INCOME TAX ACT, 1961

--Income from other sources--Deduction under section 57(iii) Interest paid by assessee after having taken over liability of company --Assessee was an Individual and ex-director in the private limited company. The company had availed a cash credit loan for which assessee was a guarantor in his capacity as director and individual. Since the company defaulted in making the payment, the assessee and other guarantors requested the bank to release the company from loan liability and allow them to take over the said liability personally, subject to payment of certain settlement amount and simple interest thereon. The assessee showed interest income which included interest received from company. The assessee claimed the deduction of interest paid to the bank under section 57(iii). However, the AO was not satisfied with the explanation given by the assessee and disallowed the deduction of interest claimed on the ground that neither any income under section 56 had accrued to the assessee nor the interest liability arose in his individual hand, since it had been incurred in the capacity of the director. The AO accordingly disallowed the interest expenditure claimed by the assessee. However, the CIT(A) allowed the claim of assessee. Held: After taking over the loan liability of the company, the assessee became liable to repay the bank dues for which, the assessee had paid interest to the bank. Simultaneously, the assessee had received interest from the company on the amount of loan that had been transferred from the company to the assessee. Therefore, there was a direct nexus between the interest earned from the company and the interest paid to the bank. Under these circumstances, the interest expenditure was rightly allowed by the CIT(A) under section 57(iii).

Income Tax Act, 1961, Section 57(iii)

Distinguished:CIT v. Dr. V.P. Gopinathan (2001) 248 ITR 449 (SC)

REFERRED :

FAVOUR : In assessee's favour

A.Y. : 2006-07

IN THE ITAT PUNE BENCH

SUBSCRIBE FOR FULL CONTENT