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Issues:
1. Disallowance of interest under section 40A(8) of the IT Act, 1961. Analysis: The judgment pertains to an appeal by the assessee regarding the disallowance of interest amounting to Rs. 47,638 under section 40A(8) of the Income Tax Act, 1961 for the assessment year 1977-78. The assessee, a construction company, had purchased a plot and paid a partial amount on the date of conveyance, creating an equitable mortgage for the balance amount. The interest payable on the outstanding amount during the relevant year was Rs. 3,17,586. The Income Tax Officer (ITO) disallowed a portion of this interest under section 40A(8), which restricts the deduction of interest expenditure. Section 40A(8) was inserted in the Act in 1975, and it mandates that a percentage of interest expenditure on deposits received by a company shall not be allowed as a deduction. The dispute arose regarding the calculation of the loan percentage, with the assessee arguing it should be determined based on the loan amount on the date section 40A(8) came into force, while the authorities held it should be based on the date of creation of the mortgage. The contention of the assessee was that the loan amount should be assessed based on the conditions prevailing on the date section 40A(8) was implemented, i.e., 1st April 1976, and not on the date of the mortgage creation. However, the Tribunal rejected this argument, stating that the percentage of the loan should be determined with reference to the date of creation of the mortgage, as per the provisions of the Act. The Tribunal upheld the decision of the lower authorities, emphasizing that the loan in question did not fall under the exclusion criteria specified in the Act. Additionally, a new argument was raised by the assessee's counsel during the appeal, claiming that the company should be considered a financial company exempt from section 40A(8) as it was engaged in financing housing projects. This argument was dismissed as the primary business of the company was constructing and selling flats, not financing house acquisitions or constructions. Consequently, the appeal was dismissed, affirming the disallowance of the interest amount under section 40A(8) of the IT Act, 1961 for the assessment year 1977-78.
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