SLP granted against treating receipts as salary and disallowing interest expenses lacking business nexus.

SLP granted against treating receipts as salary and disallowing interest expenses lacking business nexus.

Issue

1. Whether Special Leave Petition (SLP) should be granted against the High Court’s ruling treating director’s receipts from a company as salary rather than professional/business income due to failure to produce service agreements.

2. Whether SLP should be granted against the disallowance of interest expenses on borrowed funds advanced to a company where commercial expediency and business nexus were rejected.

Facts

• The assessee, an individual and director in a company, filed returns for AYs 2013-14, 2014-15, and 2015-16, claiming a receipt of Rs. 66 lakhs from the company as professional/technical fees.

• The assessee also claimed a deduction for interest expenditure on loans raised by mortgaging personal property and advanced to the company, asserting commercial expediency or entitlement to a set-off against interest income.

• The Assessing Officer (AO) reclassified the Rs. 66 lakhs receipt as salary income, observing that the assessee failed to furnish documentary evidence or details demonstrating the technical/financial services rendered.

• The AO disallowed the interest deduction, holding that the mere raising of a loan to advance to a company does not establish a direct nexus with any business or profession carried on by the assessee.

• The Tribunal and the High Court affirmed the AO’s orders, holding that in the absence of evidence showing financial expert services or business nexus, the receipts constituted salary and the interest expenses were non-deductible.

• The assessee approached the Supreme Court by filing a Special Leave Petition (SLP) against the High Court’s decision.

Decision

• The Supreme Court granted the Special Leave Petition (SLP) filed by the assessee against the impugned judgment of the High Court.

• The decision was rendered in favor of the assessee by issuing notice/granting leave to hear the appeal on merits.

Key Takeaways

• Supreme Court Intervention via SLP: Grant of SLP indicates that the Supreme Court found arguable legal issues regarding the reclassification of director’s professional fees into salary income and the test of commercial expediency for interest deductions.

• Documentation for Professional Fee Claims: To substantiate income under “Profits and Gains of Business or Profession” rather than “Salaries,” directors rendering specialized services must maintain robust documentary proof of the technical/advisory scope of work performed.

• Commercial Expediency Standards: The threshold for claiming interest expense deductions under Section 37(1) on loans borrowed and advanced to affiliated entities requires demonstrating a clear business nexus or commercial purpose beyond mere shareholder/director interest.