2014 (2) TMI 38 - AT - Income Tax

Interest for the preconstruction period claimed Claim of deduction u/s 24 of the Act Held that - For both the years under reference, while the income stood initially reduced by an amount, the same stood assessed at the returned income, on the ground that the assessed income could not fall below the returned income - the income as assessed is in terms of and in accordance with the law and, therefore, there is no basis for restricting the income to that returned; the assessee having claimed the entire interest for the preconstruction period in the year of completion of the relevant construction - Doing so would be in effect denying it the deduction u/s. 24(b) for the relevant years, to which it is entitled in law. The interest on the borrowed capital utilized for, construction for the preconstruction period is to be allowed in five equal installments beginning the year of the completion of construction thus, the interest is allowable @ 1/5th as per the clear mandate of law - The assessee s claim for A.Y. 2006-07 in its respect is thus not maintainable in law the matter has not been properly discussed - the disallowance of this interest is subject to the necessary confirmation by the AO while giving effect to this order Decided partly in favour of Assessee.

Summary

Issues:
- Restriction of total income by the Assessing Officer below the returned amount
- Claim for interest deduction for the preconstruction period in the year of completion of construction
- Interpretation of Explanation to section 24(b) of the Income Tax Act

Issue 1: Restriction of Total Income
The Appeals by the Assessee were for two consecutive assessment years, 2005-06 & 2006-07, arising from orders by the Commissioner of Income Tax (Appeals)-22, Mumbai, which partially allowed the assessee's appeals contesting assessments under the Income Tax Act. The main issue was the Assessing Officer's restriction of the total income to the amount returned by the assessee, despite the difference arising due to the allowance of interest for the preconstruction period. The assessee argued that there is no legal mandate for such restriction, citing relevant case law.

Issue 2: Claim for Interest Deduction
The assessee, a company dealing in food grains and oils, also received lease rent and claimed interest for the preconstruction period in the year/s of completion of construction. The Assessing Officer disallowed the interest claim, although the assessee was entitled to it in five equal installments as per the Explanation to section 24(b) of the Act. The Revenue's argument, citing a Supreme Court decision, was that the income could not be assessed lower than the returned amount. However, the Tribunal found that the income was assessed in accordance with the law, and denying the deduction would be incorrect.

Issue 3: Interpretation of Explanation to Section 24(b)
The Explanation to section 24(b) allows the deduction of interest on borrowed capital utilized for construction in five equal installments starting from the year of completion. The Tribunal found that the assessee's claim for interest deduction for the preconstruction period in the year of completion of construction was not maintainable in law for one limb of interest, while partially allowed for another. The Tribunal clarified that the correct legal position must be applied, irrespective of the parties' views, and directed for the allowance of interest deduction in accordance with the clear provision of law.

In conclusion, the Tribunal disposed of the assessee's appeals for both years based on the above analysis, emphasizing the correct application of the law in determining the income and deductions under the Income Tax Act.