2019 (6) TMI 742 - AT - Income Tax

Disallowance u/s 36(1)(iii) - assessee has claimed interest expenditure on account of interest paid to bank on loan taken from Citi Bank, which was utilized for booking of several office spaces shown in his investment details - HELD THAT - When we examine the proviso to section 36(1)(iii), its opening lines are any amount of interest paid in respect of capital borrowed for acquisition of asset shall not be allowed as deduction . In this case, first of all, assessee has failed to explain the purpose for availing the loan from the Citi Bank. Secondly, though the assessee has booked various spaces for office use but he has never taken possession thereof and as such proviso to section 36(1)(iii) is attracted. Moreover, when it is undisputed fact that the assessee has invested borrowed money along with his own funds in various office properties in order to extend its business but the same was never put to use during the year under assessment, no deduction is allowable. Assessee that section 36(1)(iii) does not speak about immovable properties rather speaks of assets only is also not sustainable because assessee cannot be allowed to blow hot and cold in the same breath as the assessee has tried to prove on record that he has invested the borrowed money for extension of the office i.e. office space which are certainly an immovable property/asset but the same has never been put to use for business purpose. In these circumstances, assessee are not applicable to the facts and circumstances of the case. Interest bearing and interest free funds available at the disposal of the assessee which are far more than amount of loan availed of is concerned, we are of the considered view that the CIT (A) has validly and legally dealt with by extending the part relief to the assessee by way of disallowance of interest on pro-rata basis and has reached the conclusion that the remaining amount is required to be disallowed under the proviso to section 36(1)(iii) - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.
2. Application of the proviso to section 36(1)(iii) regarding interest paid for acquisition of assets.
3. Determination of disallowance amount and method for computing the same.
4. Interpretation of assets in the form of advances against office space under section 36(1)(iii).
5. Alternative allowance of disallowed interest under section 37 of the Income Tax Act, 1961.

Issue 1: Disallowance of Interest under Section 36(1)(iii):
The appellant sought to set aside the order disallowing a sum under section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer disallowed interest expenditure claimed by the assessee, paid to a bank for a loan utilized for booking office spaces. The Commissioner of Income-tax (Appeals) partly allowed the appeal, restricting the addition made by the AO. The Tribunal heard the representatives and examined the orders passed by the revenue authorities.

Issue 2: Application of Proviso to Section 36(1)(iii):
The proviso to section 36(1)(iii) was invoked by the Assessing Officer to disallow the interest on the premise that borrowed money was used for investment, making it non-allowable expenditure. The appellant contended that the investment was made for extending the business and argued based on previous years' treatment. However, the Tribunal found that the assets booked were not put to use for business purposes during the assessment year, attracting the proviso to section 36(1)(iii).

Issue 3: Determination of Disallowance Amount and Method:
The Tribunal analyzed the contentions regarding the computation of disallowance under section 36(1)(iii). The appellant argued for a pro-rata basis for disallowance due to the availability of interest-bearing and interest-free funds. The Tribunal upheld the disallowance of a specific amount under the proviso to section 36(1)(iii) as determined by the Commissioner of Income-tax (Appeals).

Issue 4: Interpretation of Assets in the Form of Advances Against Office Space:
The dispute involved whether advances against office space qualified as assets under section 36(1)(iii). The Tribunal clarified that the assets booked by the assessee, though immovable properties, were not utilized for business purposes during the relevant assessment year, leading to the disallowance of interest under the proviso.

Issue 5: Alternative Allowance under Section 37:
The appellant requested an alternative allowance of the disallowed interest under section 37 of the Income Tax Act, 1961. However, the Tribunal, after considering all arguments and legal provisions, dismissed the appeal, finding no illegality or perversity in the order passed by the Commissioner of Income-tax (Appeals).

This detailed analysis covers the various issues raised in the judgment, providing a comprehensive overview of the legal arguments and conclusions reached by the Tribunal regarding the disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.