2020 (1) TMI 163 - AT - Income Tax

Disallowance of interest - nexus between interest paid on borrowings utilized for interest yielding advances - HELD THAT - The business of the assessee was already set-up since the assessee had already reflected income from real estate business during AY 2008-09. The perusal of assessee s financial statements for year under consideration would show that the assessee has obtained unsecured loans of ₹ 583.56 Lacs which has substantially been advanced to directors others (to the extent of ₹ 185.45 Lacs) and to make-up for the accumulated losses of ₹ 317.31 Lacs incurred by the assessee over the years. The assessee do not have any other source of fund except Share capital of ₹ 1 Lac. Therefore, there was complete nexus between the borrowings and lending made by the assessee. This being the case, the interest expenditure having direct nexus with interest income was clearly allowable to the assessee. Applicability of head of income - Interest income received - HELD THAT - We find that Ld. CIT(A) was correct in directing Ld.AO to assess the interest income as business income and allow interest expenditure against the same to the extent as specified in the impugned order. The ground stand dismissed to that extent. We find that factual matrix would require our indulgence only to the extent of interest on tax refund of ₹ 7.77 Lacs earned by the assessee which is a part of overall interest income of ₹ 144.41 Lacs. The said interest income, undisputedly, could not be held to be business income for the assessee rather it was assessable as Income from Other Sources. Therefore, we direct Ld.AO to modify order giving effect dated 27/11/2015 accordingly. The ground stand partly allowed to that extent. Proportionate disallowance u/s 36(1)(iii) - The issue as well as factual matrix being identical as in AY 2011-12 and since we have decided the issue on merits in AY 2011-12, taking the same, we confirm the stand of CIT(A) in directing AO to accept interest income as business income. The interest on tax refund, if any, would be assessable as Income from other sources. No indulgence would be required against proportionate disallowance u/s 36(1)(iii) as confirmed by Ld. CIT(A).

Issues Involved:
1. Condonation of Delay
2. Nexus between interest-bearing borrowings and interest-yielding advances
3. Classification of interest income as business income or income from other sources
4. Allowability of interest expenditure
5. Proportionate disallowance of interest expenditure

Issue-wise Detailed Analysis:

1. Condonation of Delay:
The revenue filed an appeal with a delay of 251 days, justifying it by stating that the appellate order for AY 2011-12 influenced the decisions for AYs 2009-10 and 2012-13. The delay was due to the initial decision not to appeal based on a report that suggested a nexus between borrowed funds and advanced funds. The delay was not considered deliberate. The tribunal, guided by principles from the Supreme Court case Collector, Land Acquisition Vs. Katiji, decided to condone the delay, emphasizing that substantial justice should prevail over technicalities.

2. Nexus between Interest-bearing Borrowings and Interest-yielding Advances:
The revenue contested the nexus between the borrowings and the advances, arguing that there was only a partial nexus. The tribunal found that the assessee had borrowed funds for business purposes but, due to market slowdown, advanced these funds to reduce interest costs. The tribunal upheld the CIT(A)'s finding of a direct nexus, as the borrowed funds were substantially advanced to directors and others, and to cover accumulated losses.

3. Classification of Interest Income:
The assessee classified interest income from loans as business income, while the revenue argued it should be classified as income from other sources. The tribunal noted that the assessee’s primary business was real estate, but it had the authority to invest and deal with surplus funds as per its Memorandum of Association. The tribunal upheld the CIT(A)'s decision to treat the interest income as business income, citing consistency with previous years and a relevant Bombay High Court decision (CIT V/s Lok Holdings). However, interest on tax refunds was to be classified as income from other sources.

4. Allowability of Interest Expenditure:
The revenue disallowed the interest expenditure, arguing that the assessee did not commence its business activities. The tribunal found that the business was already set up and that the interest expenditure had a direct nexus with the interest income. The CIT(A) had directed the AO to allow the interest expenditure against the business income, a decision upheld by the tribunal.

5. Proportionate Disallowance of Interest Expenditure:
The AO disallowed a portion of the interest expenditure, arguing that the interest paid on borrowings was higher than the interest received on advances. The CIT(A) confirmed a proportionate disallowance of ?40.96 Lacs for AY 2011-12 and ?75.39 Lacs for AY 2009-10. The tribunal upheld this proportionate disallowance.

Conclusion:
The appeals were partly allowed. The tribunal upheld the CIT(A)'s decisions on most issues, including condoning the delay, recognizing the nexus between borrowings and advances, classifying interest income as business income (except for interest on tax refunds), and allowing interest expenditure. The proportionate disallowance of interest expenditure was also upheld. The tribunal directed the AO to modify the order for the interest on tax refunds to be assessed as income from other sources.

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