2016 (5) TMI 411 - AT - Income Tax

Interest incurred on acquisition of land for expansion of business - allowability of expenses - It has not been disputed that the assessee had her own capital to the extent of ₹ 3.04 crores. The assessee s claim that the land was acquired for business purposes and shown as business asset in the Balance Sheet has not been disputed and only on assumption it has been held that it is not business purposes. In our considered view, such type of assumption cannot be sustained when in books of accounts assessee has treated the investment as business investment for future expansion. The interest incurred on acquisition of land for expansion of business is allowable as business expenditure in terms of sec. 36(1)(vii). In view of the facts, we see no justification to disallow the interest and brokerage charges paid by assessee as mentioned above which is wholly and exclusively incurred for the purpose of business and is allowable under section 36(1)(vii) besides, the assessee having own interest free funds more than ₹ 3.04 crores which is more than the investment in question. Even alternatively the assessee s claim for interest and finance charges cannot be disallowed. - Decided in favour of assessee

Summary

Issues:
1. Adhoc disallowance of expenses
2. Disallowance of interest on borrowed funds
3. Disallowance of brokerage on finance

Analysis:
1. The appellant challenged the adhoc disallowance of expenses by the ld. CIT (A). The ITAT Jaipur found the disallowance lacked specific instances of non-verification. Consequently, the disallowance of ?54,286 was deleted due to insufficient grounds for verification.

2. The issue of interest disallowance on borrowed funds for land purchase was raised. The AO alleged the cost of the asset was paid from borrowed funds without establishing a nexus. The ITAT noted the appellant had sufficient interest-free funds available, challenging the AO's assumption of nexus between borrowed funds and land purchase. The ITAT considered the appellant's arguments, citing various judgments supporting the claim. Ultimately, the ITAT allowed the appeal, rejecting the disallowance of interest and brokerage charges.

3. The disallowance of brokerage on finance was also contested. The ITAT emphasized that the land purchase was for business expansion, making the interest incurred allowable as business expenditure under section 36(1)(vii). The ITAT refuted the lower authorities' conclusions, stating that the disallowance lacked justification and was not supported by evidence. The ITAT upheld the appellant's claim, emphasizing the investment's business purpose and the allowance of interest and finance charges under section 36(1)(vii).

In conclusion, the ITAT Jaipur allowed the appeal, overturning the disallowances made by the lower authorities. The judgment highlighted the importance of establishing a nexus between borrowed funds and expenses, ultimately ruling in favor of the appellant's claims regarding interest and brokerage charges related to the land purchase for business purposes.