2012 (8) TMI 1167 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of disallowance out of interest expense amounting to Rs. 40,14,765/-.

Summary:

Issue 1: Confirmation of Disallowance of Interest Expense

The assessee filed a return of income declaring a loss of Rs. 1,05,880/- for the assessment year 2008-09. The case was selected for scrutiny, and the AO noticed that the assessee received rent from M/s. Cottage Industries Exposition Ltd. and had shown income under different heads including 'Income from House Property'. The AO disallowed a portion of the interest expense claimed by the assessee, amounting to Rs. 52,51,355/-, on the grounds that the secured loans were not fully utilized for the construction of the building but were also used for giving interest-free advances to group companies and acquiring shares of group companies. The AO allowed only Rs. 24,51,957/- as interest u/s 24(b) of the Act.

The assessee contended that the entire interest should be allowed either under the head 'Income from House Property' or 'Income from Business'. The CIT(A) partially accepted the assessee's claim, allowing Rs. 36,88,547/- as interest u/s 24(b) but confirmed the disallowance of the remaining Rs. 40,14,765/-. The CIT(A) observed that the assessee had invested borrowed funds partly in shares and partly in giving interest-free advances, which could not be allowed under the head 'Income from Business' or 'Income from Other Sources' due to the provisions of Section 14A of the Act.

On appeal, the Tribunal noted that the assessee had declared income from house property and claimed deduction u/s 24(b) for interest on term loans used for construction. The Tribunal agreed with the CIT(A) on the allowable interest u/s 24(b) but found that the AO and CIT(A) had not fully examined the commercial expediency of the interest-free advances to group companies. The Tribunal referred to the Supreme Court's decision in S.A. Builders Ltd. vs. CIT, emphasizing the need to examine the purpose and commercial expediency of such advances. The Tribunal remanded the issue of the remaining interest of Rs. 40,14,765/- back to the AO for fresh adjudication, directing that the deduction u/s 24(b) should not be disturbed.

In conclusion, the appeal of the assessee was partly allowed for statistical purposes.

(Order Pronounced in the open Court on 31-08-2012)