2018 (9) TMI 527 - AT - Income Tax

Interest expenditure disallowance - liability towards long term borrowings is ₹ 9,09,56,368/- as on 31/03/2012 and the corresponding figure as on 31/03/2011 was ₹ 8,25,10,213/- - contention of the assessee was that it had used the agricultural land for the purpose of business - Held that -Contention of assessee itself shows that investment in agricultural land cannot be held to be business asset because it should have been shown as agricultural land only. Being so, interest incurred on borrowings used for purchase of agricultural land cannot be allowed a deduction in terms of section 36(1)(iii)as the condition laid down under section 36(1)(iii) has not been fulfilled. There is direct nexus between the interest bearing loans taken by the assessee and the investment made in agricultural land. The income generated from such land acquired by way of borrowings is exempt from tax u/s. 10(1) of the Act. The assessee incurred expenditure on such borrowings and therefore is not entitled for deduction of interest u/s. 36(1)(iii) of the Act which was rightly disallowed by the Assessing Officer. AR made an alternative claim that the assessee earned agricultural income on the said land to the tune of ₹ 1,93,540/- and therefore, interest should be disallowed to that extent only and the total interest cannot be disallowed - Held that - Merely because the assessee did not earn agricultural income to the extent of disallowance of interest, disallowance cannot be reduced. It is not hard and fast rule that on each and every investment in exempted yielding asset, the assessee would earn income equivalent to the interest income. Earning of exempted income is not certain because it depends on various factors. The established facts are that the assessee used the borrowed funds for the purpose of acquisition of agricultural land and not for the purpose of business. Therefore, once the income is exempted u/s. 10(1) of the I.T. Act, the said income is directly related to the investment made in the agricultural land, it is not possible to accept the alternative contention of the Ld. AR that part of the interest may be disallowed out of the total disallowance made by the Assessing Officer. This contention of the Ld. AR is also rejected. Also there is no merit in the findings of the CIT(A) that the provisions of section 36(1)(iii) of the Act does not have clause of put to use . As per this section, interest expenditure could be allowed only if the loan was borrowed for the purpose of the business of the assessee and if it is used for the purchase of an asset which yielded exempted income, that interest expenditure cannot be allowed u/s. 36(1)(iii) of the Act. Accordingly, we reject all the contentions of the assessee. - Decided in favour of revenue

Summary

Issues Involved:
1. Disallowance of interest expenditure by the Assessing Officer.
2. Whether the interest-bearing funds were used for business purposes or for acquiring agricultural land.
3. Applicability of Section 36(1)(iii) of the Income Tax Act regarding interest on borrowed capital.
4. The legitimacy of the proportionate disallowance of interest expenses.
5. Alternative claim regarding partial disallowance of interest based on agricultural income.

Detailed Analysis:

1. Disallowance of Interest Expenditure by the Assessing Officer:
The Assessing Officer disallowed an interest expenditure of ?90,73,279/- by noting that the funds from long-term borrowings were used to purchase land valued at ?5,91,52,500/-. The officer argued that the asset was not used for business purposes and questioned the necessity of such an investment for the business of providing asset management solutions.

2. Use of Interest-Bearing Funds:
The Revenue argued that the funds were used for purchasing land intended for tapioca cultivation, yielding agricultural income exempt from tax. The contention was that any expenditure attributable to such exempt income should not be deductible from taxable income. The land purchase was seen as unrelated to the business of providing asset management solutions.

3. Applicability of Section 36(1)(iii) of the Income Tax Act:
The CIT(A) observed that under Section 36(1)(iii), interest on capital borrowed for business purposes is deductible, irrespective of whether the asset is put to use. The CIT(A) held that since the land was shown as a business asset, there was no diversion of funds warranting disallowance. However, the Tribunal disagreed, noting that the land was used for agricultural purposes, yielding exempt income, and thus did not fulfill the conditions of Section 36(1)(iii).

4. Proportionate Disallowance of Interest Expenses:
The Tribunal upheld the Assessing Officer’s decision to disallow a proportionate amount of interest expenses. It was established that the borrowed funds were used to acquire agricultural land, which yielded exempt income. The Tribunal emphasized that merely showing the land as a business asset in the balance sheet does not suffice to prove its use for business purposes. The interest incurred on borrowings for purchasing agricultural land cannot be allowed as a deduction under Section 36(1)(iii).

5. Alternative Claim Regarding Partial Disallowance:
The assessee proposed that interest should be disallowed only to the extent of the agricultural income earned (?1,93,540/-). The Tribunal rejected this alternative claim, stating that the entire interest related to the purchase of agricultural land should be disallowed. The proportionate disallowance made by the Assessing Officer (?90,73,279/- out of ?1,39,31,775/-) was deemed appropriate, as the borrowed funds were not used for business purposes.

Conclusion:
The Tribunal concluded that the interest-bearing loans were used for acquiring agricultural land, which yielded exempt income. Therefore, the interest expenditure could not be allowed as a deduction under Section 36(1)(iii). The appeal filed by the Revenue was allowed, and the disallowance of ?90,73,279/- was upheld. The Tribunal rejected the alternative claim for partial disallowance and emphasized that the conditions for deduction under Section 36(1)(iii) were not met.

Order:
The appeal filed by the Revenue is allowed. The order was pronounced in the open Court on 4th September 2018.