ITAT Upholds Section 57(iii) Deduction for Interest Paid on Borrowed Funds; Favours Assessee

Ankur Chandulal Shah has filed the present appeal in the Income Tax Appellate Tribunal (ITAT) Mumbai, challenging an order dated August 27, 2025, passed by the CIT(A)/NFAC Delhi. The case concerns the Assessment Year 2017-18. The key dispute is whether interest expenses claimed under Section 57(iii) of the Income-tax Act should be allowed against interest income under the head “Income from Other Sources.”

The assessee had filed its income tax return (ITR), declaring total income at Rs. 1.13 crore. The tax department selected the return for scrutiny. Since the assessee did not respond to the notices issued against him, the Assessing Officer (AO) completed the assessment ex parte, claiming there was no proof that the borrowed funds were used to earn the interest income and disallowed an interest deduction of Rs. 1.06 crore.

The aggrieved assessee filed an appeal before the CIT(A), where it stated that he had earned total interest income of approximately Rs. 1.76 crore from loans given to M/s Ariha Diamonds Jewellery Pvt. Ltd., and that these loans were funded using borrowed money on which he paid total interest of about Rs. 1.06 crore. To prove the aforesaid claims, the assessee also furnished all relevant documents proving a direct connection between interest paid and interest earned. However, the CIT(A) did not find the evidence proving the connection valid and hence rejected the deduction.

Thereafter, the assessee filed an appeal before the ITAT Mumbai. When the tribunal analysed the facts of the case, it noted that the assessee had furnished sufficient evidence proving the connection between borrowed funds and interest income earned. Further noted that the interest income and interest expense were genuine and that the net interest income had already been offered to tax.

To announce the final decision, the tribunal cited an earlier Supreme Court judgement in the case of CIT v. Rajendra Prasad Moody that the expression “for the purpose of making or earning such income” rules that if an expense is incurred to earn income, and there is a clear nexus, the deduction under Section 57(iii) should be allowed. Since the income was actually earned and taxed, the action of disallowing the expense was unjustified. In conclusion, the tribunal deleted the Rs. 1.06 crore disallowance and ruled in favour of the assessee.