Whether interest expenditure incurred on borrowed funds can be allowed as a deduction under section 57(iii) against interest income earned from loans and advances given to a company, when the intention and nexus between borrowing and lending are established.
Citation:
Ankur Chandulal Shah vs Assistant Commissioner of Income Tax, Circle-19(1), Mumbai ITA No. 5901/Mum/2025-Assessment Year: 2017-18
Order dated: 27 January 2026-Bench: Income Tax Appellate Tribunal, Mumbai
Coram: Shri Amit Shukla, Judicial Member
Section 57(iii) of the Income-tax Act, 1961:
Allows deduction of expenditure (not being capital expenditure) laid out wholly and exclusively for the purpose of making or earning income chargeable under the head Income from Other Sources.
Facts of the Case:
(i) The assessee, an individual, earned interest income of â‚ą1,76,81,852 from loans advanced to M/s Ariha Diamonds Jewellery Pvt. Ltd., in which he was a Director and shareholder.
(ii) The loans advanced were funded through borrowings from family members and friends, on which interest of â‚ą1,06,32,156 was paid.
(iii) The assessee offered only net interest income under “Income from Other Sources”.
(iv) The assessment was completed ex parte u/s 144, disallowing the entire interest expenditure for alleged lack of nexus.
(v) Before CIT(A), additional evidence such as confirmations and ledger accounts were filed and admitted under Rule 46A, yet the disallowance was upheld.
Findings of CIT(A):
(i) Held that deduction under section 57(iii) is allowable only if a direct nexus is conclusively proved.
(ii) Observed that the assessee failed to furnish loan agreements, fund-flow statements, or bank-wise linkage of borrowed funds.
(iii) Concluded that mere intention is insufficient without documentary proof of utilisation.
(iv) Upheld the disallowance of â‚ą1,06,32,156.
ITAT Findings
The Tribunal noted that:
(a) Interest income was undisputed and duly taxed.
(b) Interest expenditure was genuine and supported by confirmations and ledger accounts.
(c) The assessee had clearly reduced interest paid from interest received, offering only the net income to tax.
Once the additional evidence was admitted and no adverse finding emerged in the remand report, the CIT(A) could not reject the claim on conjectures.
The Tribunal held that a live and proximate nexus between borrowed funds and interest-earning activity stood established.
Reliance on CIT v. Rajendra Prasad Moody (SC) was reaffirmed – What matters under Section 57(iii) is the intention and nexus, not the magnitude or timing of income.
In the present case, both intention and actual earning of income were proved.
ITAT Outcome:
Disallowance of interest expenditure of â‚ą1,06,32,156 under section 57(iii) was deleted. Appeal of the assessee allowed in full.
By,
Ajay Kumar Agarwal, FCA (Sr. Partner)
(Ajay K. Agarwal & Associates Chartered Accountants, New Delhi)
Disclaimer:
This article is intended solely for academic and professional discussion. It does not constitute legal advice or a formal opinion. The views expressed are personal and based on the author’s understanding of the statutory provisions, CBDT instructions and judicial precedents as on the date of writing. Readers are advised to consult the relevant statutory provisions and professional advisors before acting on the basis of this article.
