ITAT Rules Interest on FDR-Backed Overdraft Not Deductible Without Direct Nexus Under Section 57(iii):

The ITAT Guwahati has dismissed an appeal filed by Raghuraj Singh Rajawat, upholding the disallowance of Rs 31.80 lakh claimed as interest expenditure under Section 57(iii) of the Income Tax Act, 1961. The Tribunal held that the assessee failed to establish a direct connection between the interest expenditure and the income earned from fixed deposits.

Raghuraj Singh Rajawat had declared an aggregate income of Rs 7.47 lakh for the Assessment Year 2017-18. The Assessing Officer (AO) selected the case for scrutiny and issued notices under Section 143(2) and 142(1) of the Income Tax Act; however, the assessee did not furnish any reply to these notices. Thereafter, the AO issued the third notice, and the assessee did furnish a reply.

During the relevant period, the assessee had paid interest to the bank (Rs 10.64 lakh to UBI Jaipur, Rs 1.01 lakh to OBC Jaipur, Rs 32,727 to BOB Jaipur, Rs 6.23 lakh to UCO Dudu, Rs 98,805 to SBI Dudu, and Rs 12.60 lakh to SBI Jaipur) for overdraft taken against FDR. Since the assessee had failed to prove any direct nexus between the income earned and interest paid, the AO disallowed the interest paid to the different banks on the overdraft taken against the FDRs

The aggrieved assessee filed an appeal before the first appellate authority, the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) had also observed the same, that the assessee had received interest on FDRs from various banks totaling Rs 40.78 lakh, while the interest payment made by the assessee to the banks was Rs 31.80 lakh.

It was further noted that "the purpose of these loans is not directly related to interest earned but the O/D was taken against the fixed deposits, so as to preserve the potential interest income from FDRs and the interest expenditure is allowable as deduction when it is paid on monies used for acquiring asset from which income derived is assessable under the head “income from other sources”. As long as the loan taken is not reinvested to obtain income from other sources, this is not an allowable expenses u/s 57(iii) of the Act."

Accordingly, the CIT(A) dismissed the appeal and sustained the impugned disallowance. Subsequently, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT) Guwahati, challenging the CIT(A)'s order.

Before the ITAT, the assessee also sought condonation of a 656-day delay in filing the appeal. He explained that his PAN jurisdiction continued to reflect Silchar, Assam, despite his residence and regular tax filings being in Jaipur. The Tribunal accepted the explanation and condoned the delay.

On merits, however, the ITAT noted that "the assessee has received interest of Rs 40,78,182/- on fixed deposit but during the course of proceedings before the lower authorities, the assessee could not establish the linkage between the income earned and interest expenditure incurred. Accordingly, the assessee’s expenditure claimed u/s 57(iii) of the Act is not allowable." Since the conditions for deduction under Section 57(iii) were not satisfied, the Tribunal upheld the orders of the lower authorities and dismissed the appeal.