2021 (2) TMI 342 - AT - Income Tax

Disallowance of interest on loan u/s 36(1)(iii) - assessee has not carried on any business activity in the year under consideration, thus interest was on loan obtained for construction of the building and purchase of equipment which is in the nature of capital asset as such they are not put to use - HELD THAT - The usage of loan fund to be examined by the Assessing Officer by verifying the amount released by the Standard Chartered Bank. The Assessing Officer has to examine how the fund was utilized by the assessee and whether it was used for the purpose of business, such interest has to be allowed u/s 36(1)(iii) if the business of the assessee has been commenced. At this point, it is appropriate to note that the assessee is already in the business of medical profession and the assessee is offering income from the said business or profession and now it is not possible to hold that the assessee has not commenced business as it is also the plea of the assessee that depreciation has been granted on the assets purchased out of this loan. In such circumstances, the Assessing Officer has to see only utilization of funds whether the said fund is used for the purpose of business. We deem it fit to examine the claim of the assessee by the Assessing Officer, as such we remit to the file of Assessing Officer for fresh consideration as per law. The appeal of the assessee is allowed for statistical purposes.

Summary

Issues: Disallowance of interest expenses claimed by the assessee.

Analysis:
1. The assessee appealed against the order of Commissioner of Income Tax (Appeals) for the Assessment Year 2013-14, specifically challenging the disallowance of interest amounting to ?17,86,360 by the lower authorities.

2. The dispute arose from the assessee availing two loans - one for ?52.34 lakhs and another for ?3.33 Crores, claiming interest deductions under different sections of the Income Tax Act. The Assessing Officer disallowed a portion of the interest expenses on the second loan, as the assessee failed to prove the utilization of the funds for business purposes.

3. The CIT (Appeals) upheld the disallowance, stating that the interest expenses were capital in nature as the loans were not utilized for business activities and the assets purchased were not put to use. The CIT (Appeals) concluded that the assessee was not entitled to claim interest deductions on such loans.

4. The authorized representative argued that the second loan was a business loan, mortgaged against a residential property, and the funds were used for business purposes. The representative contended that the Assessing Officer and CIT (Appeals) had contradictory findings regarding the nature of the loan and its utilization, advocating for the allowance of the interest expenses as revenue expenditure.

5. The Tribunal noted that the first loan was for housing purposes, with undisputed interest deduction under Section 24 of the Act. However, regarding the second loan, the Tribunal emphasized the need for the Assessing Officer to verify the utilization of the funds, especially for business activities, to determine the eligibility for interest deductions under Section 36(1)(iii) of the Act.

6. Considering the assessee's existing medical profession business and the claim that depreciation was granted on assets purchased using the loan, the Tribunal concluded that the Assessing Officer should reassess the utilization of the funds to ascertain if they were indeed used for business purposes. Therefore, the Tribunal remitted the case back to the Assessing Officer for a fresh examination in accordance with the law.

7. The Tribunal allowed the appeal of the assessee for statistical purposes, directing the Assessing Officer to reevaluate the claim of interest expenses on the second loan in light of the business utilization of the funds.