INCOME TAX ACT, 1961

Section 57(iii)

Income from other sources - Deduction under section 57(iii) - Interest expenditure pertaining to interest income - No direct nexus available

Assessee claimed deduction for interest expenditure of Rs. 1,43,30,28,270 incurred in respect of Zero Coupon Bonds (ZCBs) issued to Essar House Ltd. against interest income of Rs. 1,24,58,14,513 credited to P&L account, while computing income under the head 'income from other sources'. According to AO, assessee had not furnished complete particulars of said claim and deduction under section 57 could be allowed only when expenses was exclusively and wholly incurred for earning that income and accordingly, AO disallowed the entire amount of interest of Rs. 143.30 crores claimed by assessee under section 57. CIT(A) divided assessee's claim under three broad categories, i.e. (i) Interest pertaining to advance made in earlier years, (ii) interest pertaining to advance made in current year, and (iii) interest expenditure corresponding to interest income other than interest received from Essar Oil Ltd. and accordingly, allowed interest expenditure to the tune of Rs. 58.59 crores out of the totel expenditure of Rs. 143.30 crores. Held: As regards interest pertaining to advance made in earlier years, it was apparent that assessment for assessment year 2011-12 had also been framed and claim of assessee under section 57(iii) had been allowed by AO and further revenue had not taken any step for reopening assessment for assessment year 2011-12, therefore, entire amount of interest expenditure had to be allowed to assessee considering the fact that amounts advanced were out of loaned money Besides , once interest expenditure had been allowed in a particular year, same could same cannot be disallowed in subsequent year as there was no change in the facts. So far as interest relating to advance made during the year were concerned, assessee's own funds were only to the tune of Rs. 24.50 lakhs, meaning that money advanced by assessee had been out of the borrowings only and therefore, where there was no direct nexus available, interest had to be allowed on proportionate basis. As regards, interest expenditure corresponding to interest income other than interest received from Essar Oil Ltd. computation of corresponding interest expenditure had to be on proportionate basis, as wherever no direct nexus was available. Accordingly, issue was restored to AO for limited purpose of calculation.

Supported by:J.F. Laboratories Ltd. v. ITO (2005) 98 TTJ 389 (Mum-Trib) : 2005 TaxPub(DT) 1410 (Mum-Trib) and Virendra R. Gandhi v. Astt. CIT, T.A No. 20 of 2004 with T.A. No. 124 of 2005 dt. 27-11-2014 (Guj).

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2012-13

SUBSCRIBE FOR FULL CONTENT