2018 (12) TMI 1644 - AT - Income Tax

Addition being the difference between the interest paid on the amount borrowed and interest charged on the amount lent to the firm - HELD THAT - As found from record that assessee's contention to the effect that advance was taken for commercial expediency has not been considered by the AO while disallowing the interest paid to the bank. Keeping in view totality of facts and circumstances of the case, we restore this matter back to the file of AO for deciding afresh as per law. Gain from sale of flats - correct head of income - business income OR capital gain - HELD THAT - The property was developed during assessment year 2005-06 whereby 16 flats were constructed. The property was held as investment and is also reflected in the balance sheet under the head investment . Further, the main income of the assessee is from Ramanand Kidarnath International where she is a partner. The property was let out to different tenants after the construction having been completed. The assessee has exploited the capital asset by letting out the facts constructed to different tenants and the rental income has been assessed to tax under the head income from house property‟. The capital asset has been exploited to earn property income and not as stock in trade. The land has been purchased in 2000-01 and it is only in assessment year 2010-11 and 2011-12, 3 flats have been sold. In assessment year 2011-12, two flats have been sold and of the capital gain has been shown under the head capital gain‟ in the case of the assessee and other co-owners. In the case of the co-owner i.e. Ravi Goenka HUF, he had declared the gain as long term capital gain and the same has been accepted by the assessing officer. No infirmity in the order of lower authorities for treating the gain under the head business income‟.

Summary

Issues:
1. Addition of interest difference between borrowed and lent amount.
2. Treatment of income from the sale of flats as business income instead of capital gains.

Analysis:

Issue 1: Addition of Interest Difference
The appeal was filed against the order of CIT(A) sustaining the addition of the interest difference between the amount borrowed and lent by the assessee. The AO observed that the assessee obtained a loan from a bank and advanced it to a partnership firm, resulting in interest income. The AO disallowed the 2% difference in interest paid and added it to the assessee's total income. The firm's business showed consistent growth, justifying the need for additional funds. The assessing officer disallowed the interest difference based on the provisions of the Income Tax Act limiting partner interest to 12% while the loan was at 14%.

The assessee argued that the borrowing was due to the firm's limitations in borrowing directly from the bank, showing commercial expediency. The AR relied on legal precedents to support the deduction of interest paid. The ITAT found that the AO did not consider the commercial expediency aspect while disallowing the interest paid. The matter was remanded back to the AO for a fresh decision considering all aspects and in accordance with the law.

Issue 2: Treatment of Income from Sale of Flats
The second issue pertained to the treatment of income from the sale of flats as business income instead of capital gains. The property was purchased as an investment, developed, and rented out, reflecting as an investment in the balance sheet. The main income of the assessee was from a partnership firm. The property was let out to tenants, generating rental income taxed under the head of income from house property. Only a few flats were sold in the assessment years in question.

The ITAT analyzed the facts and concluded that the property was not held as stock in trade but was exploited to earn rental income. The gains from the sale of flats were rightly treated as business income. The AO was directed to compute long-term capital gains for the flats sold during the relevant year. The appeal was allowed in part, with the order pronounced on 19/12/2018.