DCIT vs Nadish Real Estate Pvt. Ltd.

“ 7.I have considered the facts of the case, assessment order, appellant's written submissions and case-laws relied on by the AO and the appellant. The brief facts of the case are that the appellant took loan from M/s. India Bulls Financial Services Ltd., part of which was utilized for purchase of lands and some part of loan was invested in FDRs or advanced as interest bearing loans to various parties. During the Financial Year 2017-18, the appellant made total interest expenses amounting to Rs.5,67,80,588/-, out of which Rs.3,29,08,918/- was capitalized and the balance interest expenses of Rs.2,38,71,670/- (56780588 (-) 32908918) was charged to revenue. The appellant submitted a working computation of Interest expenses capitalization on weighted average basis during the course of assessment proceedings. The AO disallowed the interest expenses of Rs. 2,38,71,670/- claimed u/s. 57(iii) of the Act holding that the same has not been laid down wholly and exclusively for earning the interest income. The appellant has vehemently contested the addition of Rs. 2,38,71,670/- by relying on the facts of the case and various case-laws. The appellant has explained that assessee has utilized only part of the loan amount raised from M/s India bulls Financial Services Ltd. for repayment of loan earlier raised for purchase of land, 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 to reduce interest cost, this fact is evident from the financials placed at Page-12 to25 of the Paper Book and computation of income placed at Page-11 of the Paper Book, wherein, it will be observed that interest income of Rs. 1,19,33,395/- net of interest paid has been offered to tax. The appellant further submitted that during the year, the gross interest income is Rs. 3,58,05,065/-i.e. on loans Rs. 3,57,39,987/- and on FDRs Rs. 65,078/- made from borrowings against which interest expense having direct nexus amounts to Rs. 2,38,71,670/- and the same was claimed as deduction u/s. 57(iii) of the Act, leaving a balance interest income of Rs. 1,19,33,395/- which was offered to tax. Considering the facts of the case, I am inclined to agree with the appellant's contentions. The Hon'ble Delhi High Court in the case of Vodaphone South Ltd. Vs. CIT [2015] 61 taxmann.com 415 (Delhi) considered a similar issue and held that where assessee having availed of loan from HSBC, advanced said amount to its holding company, i.e., SCL, since there was a direct nexus between earning of interest on loan advanced by assessee to SCL and payment of interest to HSBC on loan drawn in terms of sanction letter, assessee's claim for netting off of interest in terms of section 57(iii) was to be allowed. The facts of this case were that the assessee was engaged in the business of providing cellular service. It availed of financing facilities from the HSBC bank, the terms and conditions set out in the sanction letter stated inter alia that the assessee could advance the funds availed by it to any other concern, other than in the usual course of business, after receiving the bank's prior approval, during relevant year, the assessee availed of loan from HSBC at 11.60 per cent interest per annum. Immediately thereafter, on that very date, the assessee advanced a loan of Rs. 25 crores to its holding company, M/s. SCL, the assessee claimed setting off of interest income taxable as 'income from other sources' against interest expenses paid to HSBC, the Assessing Officer held that setting off the interest income of the pre-operative period against the interest expense was not allowed, it was held that interest expense would form part of the pre-operative expenses pending capitalization and the interest income would be taxed separately as income from other sources, the Tribunal too opined that the assessee was not engaged in the business of money lending, the interest income earned by the assessee was to be considered under the head 'income from other source' and the assessee's contention that the interest expenditure incurred had to be netted off against the interest income was held to be 'not sustainable’. On appeal, the Hon'ble Delhi High Court held as under-

 "The legal position as regards deduction under section 57(iii) 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 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)

Wherein 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. [Para 20]

 The revenue was under a basic misconception that the assessee was using a part of its 'surplus' borrowed funds to advance a loan to SCL, its holding company. As already noticed, the assessee had not advanced a sum of Rs. 25 crores from the surplus funds already borrowed by it for the purpose of setting up its business. [Para 21]

 In the instant case, the advancing of loan to SCL was a business decision taken by the assessee out of commercial expediency. Further, the sanction letter of HSBC made it clear that the assessee could draw loans up to the sanctioned limit as and when needed. The sanction letter also permitted the assessee to further utilise the money borrowed to advance loans to others. The sum of Rs. 25 crores drawn by the assessee in terms of HSBC's sanction letter was transferred to SCL on the very same date. Without the facility of credit by the HSBC, the assessee could not have advanced the loan. to SCL. Therefore, there was a direct nexus between the earning of interest on the loan advanced by the assessee to SCL and payment of interest to HSBC on the loan drawn in terms of the sanction letter. The income earned on the loan advanced to SCL was rightly offered to tax by the assessee as 'income from other sources. Since the interest paid to HSBC on the loan availed was in the nature of an expenditure wholly and exclusively laid out for the purpose of earning the interest income, it ought to be permitted to be netted off against such 'income from other sources' in terms of section 57(iii). [Para 22]

 In view of the above, it is held that expenditure on interest claimed by the assessee was to be allowed in terms of section 57(iii). [Para 24]

The AO's reliance on the case of M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) is misplaced and not applicable to the facts of the present case as this case was regarding taxability of interest income whereas the instant case is regarding allowability of interest expenses against the interest income. In view of the facts of the case discussed above and judicial precedent cited supra, it is held that the AO is not justified in disallowing the interest expenses of Rs. 2,38,71,670/- u/s. 57 (iii) of the Act, the addition made on this account is directed to be deleted. Grounds raised by the appellant regarding this issue are allowed.” (emphasis supplied by us)

1.

“ Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the disallowance of 2,38,71,670/-made by the Assessing Officer under Section 57(iii) of the Income-tax Act, 1961 by not appreciating the facts that the assessee had not established a direct nexus between the interest expenditure claimed under Section 57(iii) and the interest income earned, which is a mandatory condition for claiming such deduction?

2.

Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing the deduction under Section 57(iii) despite clear findings by the Assessing Officer that the borrowed funds were partly utilized for capital purposes (purchase of land) and hence the expenditure was not incurred wholly and exclusively for earning interest income?

3.

Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in not appreciating the facts that in absence of any business activity during the year and considering that land inventory increased only due to capitalization of interest, the assessee was in pre operative stage, and hence, entire interest expenditure was rightly capitalized by the AO?

4.

Whether on the facts and circumstances of the case the ld. CIT(A) has erred in allowing the assessees claim of cherry-picking a part of interest expense to be capitalized and a part of interest to be claimed as revenue expenditure, even though the business was in pre-operative stage?

5.

Whether on the facts and circumstances of the case the ld. CIT(A) has erred in ignoring the judgment of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. 5. CIT [1997] 227 ITR 172 (SC), wherein it was held that interest earned on borrowed funds parked temporarily is taxable as "income from other sources" and corresponding interest paid is not deductible.”

“1.

The appeal filed by the revenue is against order dated 05/05/2025 passed by CIT(A), NFAC.

2.

The sole issue involved in the appeal is disallowance of claim of interest amounting to Rs 2,38,71,070/- u/s 57(ii) of the Act.

3.

The assessing officer considered the disallowance of claim interest on the misconceived ground that the expenditure has not been laid out wholly and exclusively for earning interest income. The CIT(A) deleted the disallowance after going through the undisputed facts of the case and appreciating the direct nexus between the interest expense and interest income. The relevant referencing in the order AO and CIT(A) is as under:

Assessment order Page 4 to 5, para 5.6 to 9

CIT(A) order Page 19 to 22, para 7

4.

The following facts deserve your Honor’s attention:

S. No.	Particulars	Amount (In Rs.)
i.	The total interest-bearing borrowed funds outstanding during the year	56,95,74,077
ii.	Funds used for land (inventory)	32,98,27,810
iii.	Funds used for advancing loan/ kept in FD	23,97,46,267
iv.	Total interest cost	5,67,80,588
v.	Interest capitalized with inventory	3,29,08,918
vi.	Interest claimed u/s 57(ii) against interest income	2,38,71,670
vii.	Total interest income earned	3,58,05,065

5.

The assessee has earned total interest income of Rs. 3,58,05,065/- from Loan advanced and FDR against which the assessee has claimed interest expenses of Rs. 2,38,71,670/- thereby offering net interest income of Rs. 1,19,33,395/-to tax.

6.

From the above facts, it is apparent that the part of interest-bearing funds were utilized for advancing loans and creating FDR and as such there is direct and intimate nexus between the interest expense and interest income so earned thus fully justifying the claim u/s 57(ii) of the Act.

7.

The Ld. CIT(A) after taking into consideration the above facts and based on the decision of Hon'ble Delhi High Court in the case of Vodafone South Ltd. v. CIT [2015] 61 taxmann.com 415 (Delhi), has rightly deleted the disallowance and as such the order of the CIT(A) may kindly be upheld.

8.

It is further clarified that the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172(SC) as referred by the Assessing officer is not relevant.”