2014 (2) TMI 557 - AT - Income Tax

Confirmation of disallowance of interest u/s 40A(2)(b) of the Act Held that - After considering the totality of the facts of the case, in the interest of justice the disallowance is restricted to the interest made in excess of 15% - thus, the AO is directed to recompute the disallowance Decided partly in favour of Assessee. Disallowance of interest u/s 24(b) of the Act - Loan taken for construction of self- occupied property Held that - The AO has given finding on fact that the properties were not constructed, therefore in view of the Explanation attached to section 24(b) of the Act, the assessee is not entitled for deduction of interest there was no infirmity in the order of the CIT(A) as the interest is claimed by the assessee is not allowable in view of the fact that the Explanation to clause(b) of section 24 of the Act speaks about the constructed property - the property of the assessee has not been constructed Decided against Assessee. Disallowance of unexplained investment Held that - The AO has given a finding that the interest- bearing funds were utilized for construction of bungalows which was not for business purpose - the assessee is having business of transport, thus, the addition made by the AO on the basis that the assessee has utilized the borrowed fund for non-business purposes cannot be find any fault Relying upon S.A.Builders vs. CIT 2006 (12) TMI 82 - SUPREME COURT - the amount was not utilized for business purpose Decided against Assessee.

Summary

Issues:
1. Disallowance of interest incurred by the appellant on borrowed funds.
2. Disallowance of interest in respect of a loan taken for the construction of a self-occupied house property.
3. Disallowance of interest on money borrowed for non-business purposes.
4. Unexplained investment made by the appellant.

Analysis:

Issue 1: Disallowance of interest incurred by the appellant on borrowed funds (AY 2004-05):
The appellant challenged the disallowance of interest amounting to Rs.2,43,679 under section 40A(2)(b) of the Income Tax Act, 1961. The appellant argued that the disallowance was unjustified as the interest rate was not excessively high. The tribunal partially allowed the appeal, restricting the disallowance to the interest made in excess of 15%.

Issue 2: Disallowance of interest in respect of a loan taken for the construction of a self-occupied house property (AY 2004-05):
The appellant contested the disallowance of interest amounting to Rs.39,828 for a loan taken for constructing a self-occupied property. The tribunal upheld the disallowance, stating that as the property was not constructed, the interest claimed was not allowable under section 24(b) of the Act.

Issue 3: Disallowance of interest on money borrowed for non-business purposes (AY 2004-05):
The appellant disputed the disallowance of Rs.78,000 on the interest for non-business purposes, i.e., construction of a self-occupied property. The tribunal rejected this ground, affirming that the interest deduction was not allowable as the property was not constructed, as per section 24(b) of the Act.

Issue 4: Unexplained investment made by the appellant (AY 2007-08):
The appellant challenged the addition of Rs.2,56,365 as unexplained investment, contending that the funds were utilized for non-business purposes. The tribunal upheld the addition, citing that the borrowed funds were used for constructing bungalows not related to the appellant's transport business. The decision was supported by the Supreme Court's ruling in S.A. Builders vs. CIT. The tribunal found no fault in the AO's decision and dismissed the appeal.

In conclusion, the tribunal partly allowed the appeal for AY 2004-05 but dismissed the appeal for AY 2007-08, emphasizing the importance of ensuring borrowed funds are utilized for business purposes to claim deductions under the Income Tax Act.