1989 (3) TMI 165 - AT - Income Tax

Summary

Issues:
- Disallowance of interest paid by the assessee company to the bank in respect of a loan taken against equitable mortgage of a plot.

Analysis:
The appeal by the Revenue arises from the CIT(A) decision regarding the disallowance of interest paid by the assessee company to the bank for a loan taken against an equitable mortgage of a plot. The Revenue contended that the interest amount should have been capitalized as the assessee had entered into construction of a new project with a sister concern. The CIT(A) held that during the relevant accounting period, the assessee did not undertake any new capital project but had taken a loan from the bank against equitable mortgage and advanced the same on interest to another concern. The CIT(A) observed that the income received by the assessee was in the nature of interest in the money lending business with the sister concerns. Consequently, the CIT(A) deleted the disallowance made by the ITO.

The assessee developed a plot in Greater Kailash, New Delhi, and completed dwelling units thereon. Subsequently, the assessee made a further investment in property by booking space with another company. The Revenue argued that the interest paid should have been capitalized as the assessee was in the business of construction of houses. The assessee, on the other hand, contended that it did not undertake any new project during the relevant period but had engaged in money lending business with sister concerns. The ITAT agreed with the CIT(A) that no new project was undertaken by the assessee, and the income received was in the nature of interest from money lending activities. Therefore, the disallowance of interest was deleted.

The CIT(A) found that the assessee did not start any new project but engaged in money lending activities with sister concerns. The interest rate charged by the assessee to the sister concern was higher than the rate charged by the bank, indicating a money lending transaction rather than a new construction project. The ITAT concurred with the CIT(A) that the interest paid to the bank was allowable as a deduction, as it was part of the money lending business and not related to a new construction project. Consequently, the appeal by the Revenue was dismissed.

In conclusion, the ITAT upheld the CIT(A) decision to delete the disallowance of interest paid by the assessee company to the bank. The ITAT found that the assessee did not undertake any new construction project but was engaged in money lending activities with sister concerns. Therefore, the interest paid was considered allowable as a deduction, and the appeal by the Revenue was dismissed.