2020 (4) TMI 482 - AT - Income Tax

Disallo wance of interest expenses - interest bearing funds were diverted for purchase of a land - Assessee submitted that being the assessee firm s asset, the same will be utilised for its business and the interest expenses incurred cannot be disallowed - HELD THAT - For the assessment year 2008-09, an identical issue was considered by the Tribunal in assessee s own case 2020 (2) TMI 206 - ITAT COCHIN amounts borrowed have been diverted for purchase of an asset which belongs to the assessee s firm. Admittedly, the said asset was not put to use even as on date of hearing of this appeal. Therefore, going by the proviso to section 36(1)(iii) interest expenses on capital borrowed for purchase of asset cannot be allowed as deduction - interest expenditure has to be necesssarily capitalised - proviso to section 36(1)(iii) of the Act is applicable during the relevant assessment year, namely 2009-10 and since the asset (land) has not been put to use by the assessee, the interest expenditure for acquiring the same cannot be allowed as a deduction - Decided against assessee.

Summary

Issues:
Whether the CIT(A) was justified in upholding the addition of ?12 lakhs made by the Assessing Officer on account of disallowance of interest expenses due to diversion of funds for land purchase.

Analysis:
The appeal concerns the addition of ?12 lakhs by the Assessing Officer for disallowance of interest expenses claimed by the assessee firm for the assessment year 2009-10. The Assessing Officer noted that the firm had purchased land for ?1 crore from its OD account, leading to a proposal to disallow proportionate interest on this amount. The firm argued that the land purchase was intended for business use and hence not a diversion of funds. However, the Assessing Officer disagreed, considering it a diversion and disallowed the interest expenditure. The CIT(A) upheld this decision, referring to a similar issue in the firm's case for AY 2008-09.

The firm appealed to the Tribunal, arguing that the land investment was for business purposes, and income from it would be declared as the firm's income. The firm contended that the funds were not diverted but used for a firm asset. The Tribunal, considering the proviso to section 36(1)(iii) of the IT Act, ruled that interest on borrowed funds for asset acquisition cannot be deducted until the asset is put to use for business. As the land remained unused, the interest expenditure was disallowed, aligning with the decision for AY 2008-09.

The Tribunal emphasized that the proviso to section 36(1)(iii) applied for the relevant assessment year, preventing the deduction of interest expenses on capital borrowed for asset purchase until the asset is utilized for business. As the land remained unutilized, the interest expenditure was not allowable. The Tribunal's decision for AY 2008-09 was considered, and the appeal was dismissed, affirming the disallowance of ?12 lakhs.

In conclusion, the Tribunal upheld the disallowance of interest expenses due to the diversion of funds for land purchase, aligning with the proviso to section 36(1)(iii) of the IT Act, which requires assets to be put to business use for interest deduction. The firm's appeal was dismissed based on the identical issue and ruling for AY 2008-09, emphasizing the necessity of utilizing assets for business to claim interest deductions.