ORDER

% 24.01.2024

1. Heard learned counsels for the parties.

2. The instant appeal is proposed to be admitted on the following question of law:-

“(i)Whether in the facts and circumstances of the case Income Tax Appellate Tribunal ['ITAT'] fell in error by holding that the assessee was not entitled to claim the deduction under Section 57(iii) of the Act?”

3. We note that while dealing with the aforesaid issue the ITAT has come to the following significant conclusions:-

"8. I have carefully considered the orders of the authorities below. As mentioned elsewhere the assessee is a Chartered Accountant.

The assessee borrowed Rs.4.50 crores from M/s. Y.K. Gupta & Co. a firm of Chartered Accountants wherein the assessee is a partner the assessee extended loan of Rs.6.3 crores to M/s. Smartest Corporate Services Private Limited the assessee is claiming interest paid as deduction from interest received on the ground that interest expenses were incurred wholly and exclusively for the purpose of earning interest income. I fail to understand this transaction of the assessee. The assessee is a practicing Chartered Accountant and is not engage in money laundering business. There is no dispute that the assessee has borrowed the money from his firm for the purposes of his profession. The assessee in his wisdom borrowed money at a higher rate of interest and lended the same at a lower rate of interest. In my considered opinion the AO should have disallowed the entire interest claimed by the assessee but I cannot improve the assessment order nor I can improve the order of the CIT(A). In my considered opinion borrowing money at a higher rate of interest from a related party and lending the same a lower rate of interest to an unrelated party defies all commercial prudence expected from a Chartered Accountant. Surrounding circumstances cannot be ignored."

4. Learned counsel for the appellant has drawn our attention to the principles governing exemptions that may be claimed in terms of Section 57(iii) of the Income Tax Act, 1961 ['Act'] and more particularly the decision in Vodafone South Ltd. v. Commissioner of Income Tax[2015 SCC OnLine Del 12344].

5. While dealing with the question of expenditure which would be allowable under clause (iii) of Section 57 of the Act, the Court culled out the following principles:-

"20. The legal position as regards the deduction under section 57(iii) of the Act of expenditure laid out or expended wholly or exclusively for the purpose of making or earning "Income from other sources" may be summarised as under:

(i) For the purpose of the deduction in terms of section 57(iii) the test is not whether the transaction for which the expenditure was laid out was a prudent one which resulted in ultimate gain to the assessee, but whether it was properly entered into as a part of the assessee's legitimate commercial undertaking in order indirectly to facilitate the carrying on of its business.

(ii) The expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. In other words, if it is such expenditure as a prudent businessman would incur for the purpose of business.

(iii) Once it is established that there was nexus between the expenditure and the purpose of the business, not necessarily the business of the assessee itself, the Revenue cannot put itself in the armchair of the businessman and decide how much of the expenditure is reasonable having regard to the circumstances of the case.

(iv) Where in the pre-operative phase the surplus funds borrowed for the purpose of business are kept by an assessee in fixed deposits, the interest earned thereon would be 'income from other sources'. The interest paid on the loan borrowed would not be permitted to be netted against such interest income in the pre- operative phase."

6. Viewed in light of the aforesaid principles, it is manifest that the exp