Deduction against FDR interest allowed for interest paid on unsecured loans taken to make investment

Interest on FDRs-deduction of Interest paid on unsecured loans taken to make investment in bank FDRs allowed u/s 57(iii) in view of the clear nexus.

ABCAUS Case Law Citation:
ABCAUS 2673 (2018) (12) ITAT

Important Case Laws Cited/reliedupon:
CITvs. V.P. Gopinathan (2001) 248 ITR 449 (SC)

The appeal by the assessee was directed against the Order of the CIT(A) in confirming the addition on account of interest paid on unsecured loans.

The assessee in the computation of income had shown income from house property,Profit & Gains from business & profession, income from Capital gains and Income from other sources.

The assessee had earned interest income on Bank Fixed Deposits Receipts (FDRs). The assessee, offered net interest income after deduction u/s 57(iii) of the IncomeTax Act, 1961 (the Act).

Theassessee was required to explain the nature of deduction claimed. The assesseeexplained that she had obtained unsecured loans from two persons on which, the interest was paid. It was further stated that these loans had been taken to make investment in FDRs.

It was also stated that unsecured loans had been obtained only for the purpose of earning interest income on FDRs and the interest paid to these ladies should be allowed under section 57(iii) of the Act, as the interest on unsecured loans has been paid wholly and exclusively for the purpose of earning interest income on FDRs.

The Assessing Officer (AO) however, did not accept the contention of assessee and rejected the claim of assessee.

The assessee challenged the addition before the CIT(A).

It was submitted that assessee had obtained interest bearing loans from two persons on which interest has been paid and since these loans were used to make investment in bank FDRs, such interest payment is deductible expenditure.

It was also explained that interest bearing loans have been used for the purpose of making FDRs and earn interest on FDRs.

The CIT(A)however, noted that against the above FDRs loan from the bank have been taken to repay to the two lenders. Therefore, had intention of the assessee been toearn interest income on FDRs, loan taken against FDRs should not have been used for the repayment of unsecured loans. The addition was, therefore, confirmed.

The Tribunal observed that Section 57(iii) of the Act provides for the deduction under the Head “Income from other sources” and it is provided that “income chargeable under the Head “Income from other sources” shall be computed after making the deduction. “any other expenditure” (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of makingor earning such income.”

The Tribunal noted that it was not in dispute that assessee had obtained unsecured loans from two persons on which interest was paid. It was also not in dispute that these loans had been taken to make investment in FDRs on which interest have been earned.

The Tribunal opined that there was a clear nexus between the interest income and the interest expenditure incurred wholly and exclusively for the purpose of earning such income. Therefore, assessee was entitled for deduction under section 57(iii) of the Act.

Accordingly,the Tribunal set aside the Orders of the authorities below and deleted the addition.

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