Interest Exp. Incurred on Loan Taken to Advance to Family Members & Related Firms Allowable u/s 57(iii) | ITAT

Case Details: Shantiben K Rita vs. Income-tax Officer - [2025] 172 taxmann.com 654 (Mumbai-Trib.)

Judiciary and Counsel Details

• Amarjit Singh, Accountant Member & Sandeep Singh Karhail, Judicial Member
• Surji D. Chheda, CA for the Appellant.
• Bhangepatil Pushkaraj Ramesh, Sr.DR for the Respondent.

Facts of the Case

The assessee was an individual and a partner in two partnership firms. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had given interest-free loans to family members and related firms. However, the assessee paid interest on the loans taken from others. The interest expenditure was claimed as a deduction under section 57 while computing the income chargeable under the head “income from other sources”.

The AO issued a show-cause notice to the assessee as to why the minimum interest earned by the assessee from loans given be not calculated at the interest rate of 9.04%. In response, the assessee submitted that the actual interest rate differs from the prevailing market rate and is decided upon by various factors like financial ability, negotiable skills, etc.

The AO restricted the interest expenditure to a rate of 5.22% and disallowed the excess interest expenditure. On appeal, CIT(A) upheld the disallowance. Aggrieved-assessee filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that there was no dispute regarding the nature of expenditure, and the revenue has only disputed that the interest expenditure claimed under the aforesaid section has no nexus for the purpose of earning the interest income. The Revenue has brought no material on record to show that the loan received by the assessee was utilised for any purpose other than giving the loan to her family members or related firms.

Further, no material was on record to show any impediment on the assessee to give the money as a loan to her family members or related firms. Thus, there is no material to dispute that the assessee utilised the interest-bearing borrowed funds to advance the loans to her family members or related firms.

The Revenue emphasised the aspect of business prudence in advancing the loans to the sister concern at lower rates than the rate at which the assessee borrowed the funds. However, the test of commercial expediency/business prudence is required to be judged from the point of view of the businessman and not the revenue. Therefore, there is no basis for restricting the interest expenditure claimed by the assessee under section 57(iii).

List of Cases Reviewed

• CIT v. Dr. V.P. Gopinathan, reported in (2001) 248 ITR 449 (SC)
• Mathew Joseph v. ACIT, reported in (2017) 87 taxmann.com 317 (Kerala)
• CIT v. United Wire Ropes Ltd. reported in (1980) 121 ITR 762 (Bom)
• Karnataka Forest Plantations Corporation Ltd. v. CIT, reported in (1985) 156 ITR 275 (Karnataka)..[Paras 9, 10, and 11] distinguished.

List of Cases Referred to

• CIT v. Dr. V.P. Gopinathan [2001] 116 Taxman 489/248 ITR 449 (SC) (para 9)
• Mathew Joseph v. Asstt. CIT [2017] 87 taxmann.com 317 (Kerala) (para 10)
• CIT v. United Wire Ropes Ltd. [1980] 121 ITR 762 (Bombay) (para 10)
• Karnataka Forest Plantations Corpn. Ltd. v. CIT [1986] 27 Taxman 431/[1985] 156 ITR 275 (Karnataka) (para 11).