2014 (4) TMI 428 - AT - Income Tax

Claim of interest on borrowed amount Amount paid to another sister concern - Revision of order by CIT u/s 263 Held that - Assessee did borrow funds to pay M/s. Salivahana Associates for completion of the building, which was leased out - there is no diversion of funds as alleged by the CIT - there is no other activity for the assessee except owning 50% share of the property which was leased out - since assessee is owning the property of 50% of the share of the building and lease rent was also offered accordingly on the same area, finding by CIT that the supplementary agreement is not a real deed is not based on record - these aspects were examined by the A.O. in A.Y. 2005-06 which was the first year, of not only rental income but also claim of interest on the borrowed funds, the observations of the CIT cannot be upheld the opinion of the CIT is not based on the facts on record and AO examined the issue and given a finding that assessee owns 50% of the constructed area thus, the CIT has not exercised the jurisdiction correctly the order of the CIT set aside Decided in favour of Assessee.

Summary

Issues:
Assessment under section 263 of the Income Tax Act for claimed interest on borrowed amount.

Analysis:
The judgment involved two appeals by the assessee against an order passed under section 263 of the Income Tax Act by CIT-5, Hyderabad. The CIT observed that the assessee had claimed interest on a borrowed amount of Rs. 3 crores paid to a sister concern, which was deemed not allowable. The CIT based this decision on the grounds that the supplementary deed was considered a colorable device by the assessee to claim interest expenditure from rental income. Additionally, it was noted that the assessee had not borrowed any money for property acquisition or renovation, rendering the interest claim not allowable under section 24(b) of the Income Tax Act. Consequently, the CIT set aside the order to further examine the claim's allowability under section 24(b) of the Act.

The assessee's counsel argued that the CIT's observations were incorrect as the assessing officer (AO) had examined the original and revised deeds, along with the loan transactions, during the assessment proceedings for the previous year. The counsel pointed out that the AO had accepted the long-term capital gains and income from house property, including the interest claimed on the amount paid to the sister concern. It was emphasized that the transactions were duly examined by the AO, and the CIT's order for re-examination was deemed incorrect based on the facts presented.

The Deputy Commissioner of Income Tax (D.R.) contended that the AO had not recorded any findings during the assessment proceedings for the relevant years, justifying the CIT's invocation of section 263. However, the Tribunal found that the assessee had indeed borrowed funds to pay the sister concern for building completion, and there was no diversion of funds as alleged by the CIT. The Tribunal further noted that the AO had already examined the interest claim on borrowed funds in the previous assessment year, where the supplementary deed was considered. Therefore, the Tribunal concluded that the CIT's opinion was not based on facts and that the AO had correctly examined the issue previously, making the CIT's order unsustainable under the law.

Ultimately, the Tribunal allowed the assessee's appeals, setting aside the CIT's orders for the impugned years. The Tribunal held that since the issue had been adequately examined by the AO in a previous assessment year, the CIT had not exercised jurisdiction correctly in this case.

In conclusion, the Tribunal's detailed analysis highlighted the discrepancies in the CIT's observations, emphasizing the importance of factual examination by the AO in determining the allowability of the interest claim on borrowed funds. The judgment underscored the significance of proper assessment procedures and factual considerations in tax matters to ensure fair and accurate determinations.