ITAT Mumbai Allows Deduction u/s 57(iii) for Interest on

ITAT Mumbai Allows Deduction u/s 57(iii)

Shantilal Bachubhai Rita vs. Revenue [Income Tax Appeal No. 2356 of 2024]

Background of the Case

The appellant, Shantilal Bachubhai Rita filed his ITR for the AY 2017-18, declaring a total income of Rs. 3,66,480. The appellant earned income from salary, business, and other sources, including interest income. During scrutiny, the AO observed that while the appellant reported interest income of Rs. 20,39,731, and claimed a deduction of Rs. 1,20,39,731 under Section 57(iii) of the Income Tax Act, 1961, for interest expenses, resulting in nil income under “Income from Other Sources.” The AO disallowed the entire deduction, arguing that the expenditure lacked nexus with the interest income. The disallowance was upheld by the Commissioner of Income Tax (Appeals), prompting the appellant to appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai.

Arguments by the Appellant

The appellant contended that the borrowed funds were exclusively used to lend money to a company where he served as a director, and the interest paid on these borrowings was directly linked to the interest income earned. He provided detailed computations showing that the interest expense was proportionately allocated to interest-bearing loans advanced to the company. The appellant emphasized that the AO and CIT(A) ignored this precedent and failed to substantiate their claim that the arrangement was a “colorable device.”

The appellant also relied on a prior ITAT order in his own case for AY 2020-21 (ITA No. 3406/Mum/2024), where a similar disallowance was deleted. The Tribunal in that case held that the interest expenditure was incurred wholly and exclusively for earning interest income, satisfying Section 57(iii).

Respondent’s Response

The respondent, defended the disallowance, arguing that the appellant loan transactions lacked commercial purpose. Further the revenue submitted that the borrowed funds were diverted to a related company merely to claim deductions, not for genuine business needs. The Revenue also highlighted discrepancies in the appellant loan utilization, noting that 28.3% of borrowed funds were diverted to non-interest-bearing investments, undermining the exclusivity requirement under Section 57(iii). The Revenue contended that the CIT(A) correctly dismissed the claim as a tax-avoidance strategy.

Court Findings and Decision

The ITAT Mumbai ruled in favor of the appellant, and held that the borrowed funds were directly deployed for interest-earning loans, and the appellant had voluntarily disallowed Rs. 23,34,069 (proportionate to non-interest-bearing loans). Relying on the co-ordinate bench’s decision in the appellant own case, the Tribunal held that the interest expenditure met the Section 57(iii) criteria of being “wholly and exclusively” for earning interest income. The ITAT deleted the addition of Rs. 1,20,39,731, observing that the AO and CIT(A) failed to rebut the appellant evidence or justify departing from the precedent.