2018 (9) TMI 63 - AT - Income Tax

Deduction of interest from income from house property - Disallowance of interest paid to Axis Bank Ltd - the assessee could not establish the nexus between the borrowing funds from Axis Bank and repayments to the previous lenders - allow the deduction of interest as business expenditure to be set off against the business income of the assessee - Held that - There is a nexus between the borrowing and repayment of earlier loan creditors. The fact is also adequately substantiated by the observation of the AO in the assessment order wherein the AO has apportioned the interest between property A and property B AO has himself observed that the interest of 1, 08, 73, 997/- which is made up of two amounts 1, 02, 37, 297/- as interest to Axis Bank Ltd. and 6, 36, 700/- paid to Ramesh S. Shah Family Trust. AO got confused and misunderstood the sequence of transaction and their chronology. The assessee first constructed the building with borrowed money thereafter to pay the major creditor Manakchand H. Loonkar HUF retired partner of 5, 15, 05, 674/-. The five partners of the firm contributed 5, 20, 00, 000/- and thereafter the loan from the Axis Bank Ltd. was used to pay the money to the partners and to the lenders. The observation of the AO that interest of 1, 08, 73, 997/- has to be apportioned between two buildings i.e. building A and B in the ratio of investment according to which the interest attributable to building A comes to 36, 97, 159/- and building B 71, 76, 838/-. We direct the AO to allow the interest of 1, 02, 37, 297/- in the proportion of 34% to building A and 36% to building B. Resultantly 67, 56, 616/- is admissible under section 2(b)B and 34, 80, 681/- is to be treated as business interest be set off against the business income of the assessee. The AO is accordingly directed. - Decided partly in favour of assessee

Summary

Issues Involved:
1. Disallowance of interest of ?1,02,37,297/- paid to Axis Bank Ltd.
2. Deduction of interest as business expenditure to be set off against business income.

Detailed Analysis:

1. Disallowance of Interest of ?1,02,37,297/- Paid to Axis Bank Ltd.:

The assessee, a partnership firm engaged in real estate development, claimed an interest deduction of ?1,08,73,636/- under Section 24 of the Income Tax Act, which included ?1,02,37,297/- paid to Axis Bank Ltd. The Assessing Officer (AO) disallowed this interest on the grounds that the assessee could not establish a nexus between the borrowed funds from Axis Bank and the repayment to previous lenders. The AO noted that the property was acquired before borrowing from Axis Bank, and thus, the interest was not admissible under Section 24B of the Act. The AO further observed that the assessee had converted unsold stock into investment in FY 2007-08 and apportioned the interest between Building A and Building B based on their investment values.

In the appellate proceedings, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee failed to establish the nexus between the borrowed funds and the repayment of loans taken for property construction. The assessee argued that the loan from Axis Bank was used to repay earlier loans taken for construction, thus establishing a direct nexus. The Tribunal found that there was a nexus between the borrowings and the repayment of earlier loans, as substantiated by the AO's own observations. The Tribunal directed the AO to allow the interest of ?1,02,37,297/- in proportion to the investments in Building A and Building B.

2. Deduction of Interest as Business Expenditure to Be Set Off Against Business Income:

The assessee also raised a ground that if the interest deduction under Section 24B was not accepted, the interest should be allowed as a business expenditure to be set off against business income. The Tribunal noted that the AO had apportioned the interest based on the investments in the two buildings and directed that ?67,56,616/- be allowed under Section 24B and ?34,80,681/- be treated as business interest to be set off against the business income.

Conclusion:

The Tribunal concluded that the assessee had established a nexus between the borrowed funds from Axis Bank and the repayment of earlier loans, thus allowing the interest deduction. The AO was directed to allow the interest of ?1,02,37,297/- in the proportion of 34% to Building A and 66% to Building B, resulting in ?67,56,616/- being admissible under Section 24B and ?34,80,681/- as business interest to be set off against business income. The appeal of the assessee was partly allowed.