2013 (12) TMI 538 - AT - Income Tax

Disallowance of interest expenses assessee has swapped earlier loan by new loan - purchase of Tenancy Development Rights(TDR) - The assessee has paid interest on unsecured loan from ACT Fininvest Pvt. Ltd., and Peninsula Land Ltd. on the loans borrowed in the earlier years - Held that - During the year under consideration to repay the balance loan of ACT Fininvest Pvt. Ltd., the assessee has borrowed from Peninsula Land Ltd - If the earlier loan was accepted as taken for the purposes of business, the new loan should also be accepted as taken for the purposes of business - Akin to the transaction the CBDT vide Circular No. 28 dt. 20.8.1969 has declared that if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the ITO, the interest paid on the second loan would also be allowed as a deduction u/s. 24(1)(vi) Decided in favour of assessee.

Summary

Issues:
Disallowed interest expenses on unsecured loans for A.Y. 2007-08 and 2008-09.

Analysis:
For A.Y. 2007-08, the AO disallowed interest expenses of Rs. 85,17,298 on unsecured loans for the purchase of Tenancy Development Rights (TDR) as no TDR transactions occurred during the year. The assessee argued that the loans were used for TDR purchase and repayment in earlier years. The AO rejected this, leading to the Ld. CIT(A) confirming the disallowance, stating funds were used for non-business purposes. The ITAT found the loans were used to repay earlier borrowings accepted as business-related, reversing the disallowance citing CBDT Circular No. 28. Interest of Rs. 85,17,298 was allowed.

Regarding A.Y. 2008-09, a similar issue arose, leading to the ITAT allowing the appeal based on the same reasoning as the previous year. Both appeals were allowed, overturning the disallowance of interest expenses on unsecured loans for both assessment years.