INCOME TAX ACT, 1961

Section 57 Section 37

Income from other sources - Netting of interest income against interest expenditure - Alternate allowability as deduction under section 37(1) -

Assessee claimed deduction under section 57 on account of interest paid against interest income and claimed loss for same. AO after examining facts/evidences filed, recorded a finding that assessee was unable to establish a nexus between income earned under head 'Income from other sources' and expenditure laid out or expended wholly and exclusively for purpose of earning such income as per section 57(iii).Held: For amount received on interest, assessee would not be in a position to lend amount on interest to earn interest income. Therefore, netting of interest income on interest expenditure is a prerequisite for correct determination of taxable income. Revenue was not justified in holding that there was no nexus between interest earned and interest paid. As a result, assessee was allowed to claim the interest expenses. Regarding the alternate decision of CIT(A) that interest income constituted business income, even in those circumstances, the interest paid to earn such interest income was to be allowed as deduction under section 37. Since, in principle, it was held that expenditure was allowable either way under section 57, if the income is treated under the head 'Income from other sources' as per the provisions of section 56 or under section 37, if the income is treated under the head 'Profits and gains of business or profession' as per provisions of section 28, issue regarding claim of preclusion or collateral estoppel under 'which head' the income earned by assessee was taxable, was not decided.

REFERRED : Distributors (Baroda) (P) Ltd. v. UOI & Ors. (1985) 155 ITR 120 (SC) : 1985 TaxPub(DT) 1293 (SC), Kanhaiyalal Dudheria v. Jt. CIT [ITA 782 and 1495, dt. 17-5-2017] : 2017 TaxPub(DT) 1723 (Bang-Trib),