High Court of Kerala recently declared that interest from loan given to sister concern cannot be set off against the interest paid by the assessee to his benkers for the purpose of eligible deduction under section 57(iii) of the Income Tax Act 1961.
Assessee in the recent case was engaged in trading business and during the assessment year the assessee filed his return of income declared a total income of Rs. 32700.
During the course of assessment proceedings the Assessing Officer found that the assessee has received an income from his sister concern which was omitted to shown in the return and the same was escaped from assessment. Accordingly the AO issued notice under section 143(2) of the act and also initiated further proceedings. The revenue department also upheld the decision of the AO.
Assessee contended that he took a loan from their bankers for the promotion of his export business at the rate of 12 percent of interest per annum. Thereafter a portion of the said loan was transferred to his sister concern at the same rate of interest per annum.
After considering the rival submissions, Justice P.R.Ramachandra Menon and Justice Shircy.V observed that the interest obtained by the assessee from his sister concern on the advance given by him was liable to be set off against the interest paid by the assessee to the bankers, as the entire amount was exclusively used for the purpose of generating income, hence it was liable to be deducted in terms of Section 57(iii) of the Income Tax Act. And it is clear that the diversion of part of the loan to another concern, in which the assessee had an interest, was not in connection with the export business of the assessee. Therefore, the income generated by the assessee as in the form of interest on loan from his sister concern is taxable under the head ‘income from other sources’ to which he had no direct liability to pay any interest.
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