Netting of income is permitted under Section 57 since interest collected and paid are directly related

Fact and issue of the case

The aforesaid appeal has been filed by the assessee against order dated 30/03/2022, passed by Ld. Pr. CIT, Mumbai-19, in his revisionary jurisdiction u/s.263 of the Act for the A.Y.2017-18.

In the grounds of appeal, the assessee has raised the following grounds:-

On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income Tax (Pr. CIT) erred in invoking the provisions of section 263 of the Act and setting aside the order of the Ld. A.O.

On the facts and circumstances of the case & in law, the learned Pr.CIT has erred in Invoking section 263 of the Act on the same issues which specifically formed a part of the CASS limited scrutiny, which were adjudicated by the Ld. AO after due application of his mind, and passed the order u/s 143(3) of the Act. This tantamount to substituting the opinion of the Ld. AO by the Pr. CIT which is bad in law.

On the facts and circumstances of the case, the order passed by Pr. CIT under section 263 of the Income Tax Act is unsustainable as power to revise can be invoked in the case of lack of enquiry by the Ld. AO, and not in the case of inadequate enquiry

The appellant craves leave to add, alter or delete all or modify any or all the above grounds of appeal.

The facts in brief qua the issue raised in the impugned order are that, assessee is an individual and partner in M/s. Ritesh Exports. He has filed the return of income on 30/03/2018 declaring total income of Rs.94,85,830/-. The said return was selected for limited scrutiny under CASS to examine the deduction against the head ‘income from other sources’ claimed in the ITR. The AO during the assessment proceedings called for various details to about the interest income and the claim of interest deduction made by the assessee. After examining the details, the Assessing Officer passed the order u/s.143 (3) vide order dated 06/12/2019 accepting the return of income.

Thereafter, the ld. PCIT in his revisionary jurisdiction called for the assessment records and noted that assessee has claimed interest expenses of Rs.37,16,200/- on SBI term loan as against interest income received from the partnership firm of Rs. 46,23,832/-. The assessee has declared net interest income after claiming interest expenses u/s.57, i.e., interest paid on SBI term loan of Rs.37,16,200/- was claimed as expenditure allowable u/s.57 of the Act. He observed that AO has not verified the said claim properly and therefore, the order of the AO is erroneous in so far as prejudicial to the interest of the Revenue.

Observation by the tribunal

The tribunal has heard the rival submissions and perused relevant finding given in the impugned order as well material referred to before us. The undisputed fact with respect to the issue involved are that, assessee is a partner in the firm M/s. Ritesh Exports and he has taken a term loan from SBI of Rs.4 Crores which was deposited in his partnership firm but not towards the capital account of the partner. From the perusal of the profit and loss account of the assessee, we find that assessee has received interest on capital from M/s. Ritesh Exports of Rs.17,60,000/-and there is a separate income of interest on loan received from M/s. Ritesh Exports at Rs.46,23,832/-. This term loan from SBI was taken in the F.Y. 2013-14 and was immediately deposited to the partnership firm from where assessee has been receiving interest from firm and from that interest income; the assessee has been paying interest to the bank. In all the earlier years, the claim of interest is only out of interest income from the firm which has been accepted in scrutiny proceedings u/s. 143(3). In support, the assessment order for the A.Y.2014-15 and 2015-16 has been filed in the paper book. In the computation of income, the assessee had shown interest income and interest expenditure in the following manner:-

MUKESH SHAH A.Y.2017-18

Person or Property From Whom/Which Income received	Amount Income	Nature of Receipt
Bank Interest	28,913	Int Income
Ritesh Export	46,23,832	Int Income
Torrent Power Co Ltd	27,067	Int Income
Interest on Refund	18,835	Int Income
Less : interest paid to	46,98,647
SBI for term Loan	37,16,200
Net Income	982,447

Further from the perusal of the audited balance sheet and profit and loss account of the firm M/s. Ritesh Exports as on 31/03/2017, it is noticed that the assessee has received interest on capital contribution of Rs. 17,60,000/- which has been shown separately. Apart from that, it has paid interest on loan taken from the assessee of Rs.46,23,842/-. The loan taken by the firm from the assessee, in turn was taken by the assessee from the SBI. Thus, the assessee received interest on loan given to the firm and on the same loan taken from the bank, the assessee has paid interest. Thus, there was direct nexus between earning of the interest income and interest paid. Accordingly, the netting of the net interest income after deducting the interest paid to the bank had direct nexus which is allowable under Section 57. This aspect of the matter was also examined by the AO and assessee has filed all the replies which were called upon by the AO. Thus, we do not find any infirmity in allowing the interest paid by the AO and therefore, order of ld. PCIT cannot be sustained, because on merits the assessment order is neither erroneous nor prejudicial to the interest of the Revenue and therefore, on merits, the appeal of the assessee is allowed.

In the result, appeal of the assessee is allowed.

Order pronounced on 31st March, 2023