2017 (11) TMI 525 - AT - Income Tax

Addition on account of interest of funds borrowed for acquiring immovable - loan taken by the assessee was for investment in purchase of property or for earning interest? - whether the interest expenditure incurred by the assessee on the loan availed of from M/s. Reliance Capital Limited is directly related with the interest income earned on advance made to M/s. Omaxe Limited should be allowed to be deducted from the said interest income u/s 57 (iii) - Held that - When we examine all these facts in the light of the fact that M/s. Reliance Capital Limited, M/s. Omaxe Limited and assessee are into litigation before Hon ble Delhi High Court qua the property in question and the property has also not been transferred in the name of assessee, the assessee will certainly get benefit of interest payment on the loan of ₹ 6,00,00,000/- u/s 57 (iii) of the Act as it is not a house property income as has been held by the AO. Rather it was invested in the commercial property made by the assessee to get assured return / interest from his investment of ₹ 6,00,00,000/-. Thus CIT (A) has rightly held that this income is to be treated as income from other sources and the interest paid by assessee to M/s. Reliance Capital Limited is to be allowed as expenditure incurred for earning the income u/s 57 (iii) of the Act. Moreover, when there was a categoric understanding between the assessee and M/s. Reliance Capital Limited that the assessee will get assured return, the interest was being paid for the purpose of earning interest i.e. assured income from M/s. Omaxe Limited and acquisition of the property was incidental only. - Decided against revenue

Summary

Issues:
- Dispute over reducing addition of interest on funds borrowed for acquiring immovable property
- Disagreement on the purpose of loan taken from Reliance Capital Ltd
- Treatment of interest on loan as revenue or capital expenditure
- Allegation of investment in commercial property instead of house property
- Application of Tuticorin Alkali Chemicals case
- Dispute regarding addition of interest and purpose of loan for investment

Analysis:

*Dispute over reducing addition of interest on funds borrowed for acquiring immovable property:*
The Revenue challenged the CIT(A)'s decision to reduce the addition of interest on funds borrowed for acquiring immovable property. The CIT(A) had directed to adjust the reduced amount against income from other sources. The Revenue contended that the loan from Reliance Capital Ltd was not for earning income from other sources, leading to this dispute.

*Disagreement on the purpose of loan taken from Reliance Capital Ltd:*
The Revenue disagreed with the CIT(A)'s finding that the loan from Reliance Capital Ltd was for earning income from other sources. The Revenue argued that the loan was for investment in purchasing property and not for earning interest, which formed a key point of contention in the judgment.

*Treatment of interest on loan as revenue or capital expenditure:*
There was a dispute regarding the treatment of interest on the loan, with the Revenue contending that it should be considered a capital expenditure. The CIT(A) held that the interest on the loan was a revenue expenditure, which was a significant aspect of the case.

*Allegation of investment in commercial property instead of house property:*
The Revenue alleged that the assessee had made an investment in commercial property while ignoring that the unit allotted was a house property. This discrepancy in the nature of the investment raised a substantial issue in the judgment.

*Application of Tuticorin Alkali Chemicals case:*
The Revenue argued that the CIT(A) did not apply the ratio of the Tuticorin Alkali Chemicals case, which the Revenue believed was fully applicable to the present case. The application of precedents and relevant case laws played a crucial role in the legal analysis.

*Dispute regarding addition of interest and purpose of loan for investment:*
The core issue revolved around whether the interest expenditure incurred by the assessee on the loan was directly related to the interest income earned on advances made to Omaxe Limited. This dispute led to conflicting interpretations between the Revenue and the CIT(A), forming the crux of the legal judgment.

In conclusion, the judgment dismissed both appeals filed by the Revenue for the assessment years in question. The decision was based on the interpretation of relevant legal provisions, the purpose of the loan, the nature of the investment, and the application of precedents. The judgment highlighted the importance of establishing a direct relationship between the expenditure and income for tax deduction purposes, as outlined in the CIT vs. Rajendra Prasad Moody case.