Revenue vs Assessee

Headnote:(A) Income Tax Act, 1961 - Sections 57(iii), 143(3), 142(1), 115JB - Allowability of interest expenditure against interest income - Disallowance of Rs. 2,38,71,670/- by AO on grounds that expenditure was not laid out wholly and exclusively for earning interest income - CIT(A) deleted the disallowance, holding direct nexus between interest expense and interest income - Tribunal upheld CIT(A) order. (Paras 7, 8)

(B) Deduction under Section 57(iii) - Nexus test - For claiming deduction under Section 57(iii), the test is whether there is a direct and intimate nexus between the expenditure incurred and the earning of the income - Income earned on loan advanced from borrowed funds, where the sanction letter permits such advancement, qualifies for deduction under Section 57(iii). (Para 7)

(C) Precedent - Distinguishing Tuticorin Alkali Chemicals - The decision in Tuticorin Alkali Chemicals (taxability of interest income) is not applicable to cases concerning allowability of interest expenses against interest income - The case of Vodafone South Ltd. (Delhi High Court) is directly applicable where there is direct nexus between interest expenditure and interest income. (Para 7)

Facts of the case:
The assessee, engaged in real estate business, took a loan from M/s India Bulls Financial Services Ltd. Part of the loan was used for land purchase and part was parked in FDRs or advanced as interest-bearing loans to various parties. During the year, the assessee earned gross interest income of Rs. 3,58,05,065/- against which it claimed interest expenditure of Rs. 2,38,71,670/- under Section 57(iii) of the Act, offering net interest income of Rs. 1,19,33,395/- to tax. The AO disallowed the deduction on the ground that the expenditure was not laid out wholly and exclusively for earning interest income and instead capitalized the entire interest expenditure. The CIT(A) deleted the disallowance.

Findings of Court:
The Tribunal held that the assessee had established a direct nexus between the interest expenditure claimed and the interest income earned, as part of the borrowed funds were deployed for advancing loans/kept in FD. The CIT(A) correctly applied the decision of the Delhi High Court in Vodafone South Ltd. and rightly distinguished the Supreme Court decision in Tuticorin Alkali Chemicals.

Issues: The main issue was whether the assessee was entitled to deduction under Section 57(iii) for interest expenditure claimed against interest income, and whether the AO's reliance on Tuticorin Alkali Chemicals was correct.

Ratio Decidendi: The court ruled that for deduction under Section 57(iii), the test is the direct and intimate nexus between the expenditure and the earning of income. Since the assessee used part of borrowed funds to earn interest income, the interest expenditure incurred on such funds is allowable as deduction. Result : Appeal of Revenue dismissed.

Legal Category Hierarchy

1. Appeal by Revenue against deletion of disallowance of interest expenses claimed under section 57(iii) of the Income Tax Act. (Para 2 )

2. Revenue argued no direct nexus between interest expenditure and income; assessee claimed direct nexus and relied on Vodafone South case. (Para 4 , 5 , 6 )

3. Tribunal dismissed Revenue's appeal, upholding CIT(A)'s deletion of disallowance of interest expenses under section 57(iii). (Para 7 , 8 )

4. What is the test for deduction under section 57(iii) of the Income Tax Act?

The test is whether the expenditure was laid out wholly and exclusively for the purpose of making or earning income from other sources; direct nexus is required. (Para 7 )

5. Does the principle in Tuticorin Alkali Chemicals (taxability of interest income) govern allowability of interest expenses under section 57(iii)?

No, Tuticorin dealt with taxability of interest income, not deduction of expenses; it is inapplicable to allowability under section 57(iii). (Para 7 )

6. Can interest expenses on borrowed funds partly used for capital purposes and partly for earning interest be netted against interest income?

Yes, if there is direct nexus between the borrowed funds used to earn interest and the interest expense incurred, deduction is allowable. (Para 7 )

PER BRAJESH KUMAR SINGH, AM,

This appeal by the Revenue is against the order of National Faceless Appeal Centre (NFAC) [hereinafter referred to as the ‘Ld. CIT(A)] order dated 05.05.2025 arising out of the assessment order dated 16.04.2021 passed under section 143(3) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) passed by the National e-Assessment Centre, Delhi, (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (AY) 2018-19.

1.1. There is a delay of 1 day in filing the present appeal before the Tribunal. The Ld. AR did not raise any objection against the said delay. Considering the nominal delay, the same is condoned and the appeal is taken up for adjudication.

2. Brief facts of the case: During the year, the assessee was engaged in the business of real estate and had filed its return of income in ITR 6 for AY 2018-19 on 25/09/2018, at a total income of Rs. 1,15,71,030/- under normal provisions of the I.T. Act and of Rs. 1,15,71,033/- u/s. 115JB of the Act. In the return of income filed, the AO noted that the assessee had admitted Nil income under 'Gross receipts from Business' and a Net Profit of Rs. (-) 3,62,362/- was shown. Further, the AO noted that the assessee admitted gross income of Rs. 3,58,05,065/- under the head 'Other Sources and had claimed expenses / deduction amounting Rs. 2,38,71,670/-, and the remaining amounting to Rs. 1,19,33,395/- (Rs. 35805065/- (-) Rs.23871670/-) was shown under 'Income from other sources'. The AO also noted that during the year the assessee had set-off the current year business loss of Rs. 3,62,362/- against the income of Rs. 1,19,33,395/- under the head 'Other Sources'.

2.1 The case was selected for complete scrutiny to examine the income from real estate with the underlying rationale that the "assessee is running real estate business and disclosing high closing stock as compared to turnover”.

2.2 On perusal of the submission filed dated 24.12.2020 by the Assessee, it was observed by the AO that during the year under assessment the assessee had no business income and the company had interest income amounting to Rs. 3,58,05,074/- which comprises the sum of Rs. 65,087/- - interest received from bank on FDR and Rs.3,57,39,987/- on account of interest received from loans given. In this connection, the AO noted that the assessee submitted the details of interest received statement showing the name of parties, PANs, their addresses, interest earned, TDS deducted and the relevant ledger a/c. details.

2.3. The AO vide notice u/s. 142(1) dated 15.02.2021, asked the assessee to give explanation pertaining to 'capitalization of interest expenses' of Rs.3,29,08,918/- and also as to whether the entire amount of loan received from M/s India Bulls Financial Services Ltd have been utilized for purchase of land.

2.4 The assessee vide its submission dated 15.02.2021 stated that the assessee has utilized only a part of the loan amount raised from M/s India Bulls Financial Services Ltd., for purchase of land, and part of the loan amount was either parked in FDRs or further advanced as interest bearing loan to various parties, from whom interest income has been earned and further stated that the net of interest paid of Rs. 1,19,33,395/- (Rs. 35805065/- (-) Rs. 23871670/-) has been offered to tax under 'Income from Other Sources'.

2.5. The AO noted that as per section 57(iii) of the Act, the deductions shall be allowed only if the interest expenses have been made wholly and exclusively for earning the interest income and in the present case, the interest expenditure of Rs. 2,38,71,670/- claimed as deduction against interest amount of Rs. 3,58,05,065/- was not an allowable expenditure as the same had not been laid down wholly and exclusively for earning the interest income and hence, the deduction of Rs. 2,38,71,670/- claimed u/s.57(iii) of the Act, was liable for disallowance. The AO further observed that on exact same facts and circumstances the Ho

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INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Brajesh Kumar Singh, AM
Revenue – Appellant
Versus
Assessee – Respondent
ITA No. 1234/2025

Deduction under Section 57(iii) of the Income Tax Act for interest expenditure against interest income is allowable if there is direct nexus between the expenditure and earning of income, even if borrowed funds were partly used for capital purposes.

Legal Category Hierarchy

Table of Contents

4. What is the test for deduction under section 57(iii) of the Income Tax Act?

5. Does the principle in Tuticorin Alkali Chemicals (taxability of interest income) govern allowability of interest expenses under section 57(iii)?

6. Can interest expenses on borrowed funds partly used for capital purposes and partly for earning interest be netted against interest income?

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)Brajesh Kumar Singh, AMRevenue – AppellantVersusAssessee – RespondentITA No. 1234/2025

Deduction under Section 57(iii) of the Income Tax Act for interest expenditure against interest income is allowable if there is direct nexus between the expenditure and earning of income, even if borrowed funds were partly used for capital purposes.

Legal Category Hierarchy

Table of Contents

4. What is the test for deduction under section 57(iii) of the Income Tax Act?

5. Does the principle in Tuticorin Alkali Chemicals (taxability of interest income) govern allowability of interest expenses under section 57(iii)?

6. Can interest expenses on borrowed funds partly used for capital purposes and partly for earning interest be netted against interest income?

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Brajesh Kumar Singh, AM
Revenue – Appellant
Versus
Assessee – Respondent
ITA No. 1234/2025