2018 (4) TMI 704 - AT - Income Tax

Disallowance of the interest claimed by way of set of - income from other sources - establishment of nexus - interest income with interest expenses - Held that - No expenditure can be allowed against the income from other sources, unless it is wholly and exclusively incurred for the purposes of making or earning of such income. As in the present case, no such nexus could be established in respect of the expenditure incurred by the assessee. Further to claim of set off u/s 70(1) against interest income, there has to be a loss under the head income from other sources or any other head of income except capital gain which is not the case of the assessee - Decided against assessee. Deduction claimed u/s 54F - denial of claim by CIT-A as assessee was holding two residential houses in his name, so he is not entitled for the deduction under section 54F - Held that - The action of the CIT(A) cannot be justified in holding both these properties as residential houses merely on the basis of their location in Jaipur House residential colony, Agra without appreciating the material facts regarding the purpose for which the properties were used; the house no. 273 in particular which was used for business purpose as it was let out by the assessee to M/s Client Technology Ltd. Agra for godown purpose. It is clear that although on the day of transfer of original asset, assessee had in his possession two residential houses i.e. 273, Jaipur House and 293, Jaipur House, however, the house no. 273 was let out to M/s Client Technology Ltd. Agra for business purpose and therefore, assessee is legally entitled for deduction under section 54F of the Act. The property was used by the assessee for business purpose by way of lease out to M/s Client Technology Pvt. Ltd. for commercial purpose of stocking of electronic items duly supported with commercial electricity connection for the period relevant. The ld. DR has not brought on record any material evidence in rebuttal to the contention of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining the addition of ?4,57,279/- made by the AO by disallowing the interest claimed.
2. Sustaining the addition of ?21,69,260/- by not allowing the deduction claimed under Section 54F of the I.T. Act.
3. General ground regarding the authorities not appreciating the submissions and facts of the case.

Issue-wise Detailed Analysis:

1. Sustaining the addition of ?4,57,279/- made by the AO by disallowing the interest claimed:

The assessee claimed a set-off of interest received from M/s Cilent Technologies Pvt. Ltd. against interest paid to City Finance Ltd. The AO disallowed the interest claim of ?4,57,279/- due to the lack of nexus between the interest paid and received, allowing only ?1,20,000/- as deduction under Section 57(iii) of the I.T. Act. The AO's observation was based on the fact that out of the loan of ?70,36,559/- from City Finance Ltd., only ?10,00,000/- was advanced to M/s Cilent Technologies Pvt. Ltd., with the rest used for other purposes. The CIT(A) upheld this disallowance, noting that the loan was mainly used for purchasing residential properties, and the nexus required under Section 57(iii) was not established. The Tribunal found no merit in the assessee's grievance, confirming the addition of ?4,57,279/-.

2. Sustaining the addition of ?21,69,260/- by not allowing the deduction claimed under Section 54F of the I.T. Act:

The assessee sold land and claimed a deduction under Section 54F for the construction of a residential house. The AO disallowed this deduction, stating that the assessee owned two residential houses on the date of the transfer of the original asset, thus not qualifying for the deduction under Section 54F. The CIT(A) confirmed this disallowance, noting that the properties were rented out for commercial purposes but were located in a residential colony, and their basic character remained residential. The Tribunal, however, found that one of the properties had a commercial electricity connection and was used for business purposes, thus qualifying the assessee for the deduction under Section 54F. The Tribunal allowed the assessee's claim of exemption of ?21,69,260/- under Section 54F.

3. General ground regarding the authorities not appreciating the submissions and facts of the case:

This ground was deemed general in nature and required no specific adjudication by the Tribunal.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding the addition of ?4,57,279/- related to the interest claim but allowing the deduction of ?21,69,260/- under Section 54F. The decision emphasized the necessity of establishing a clear nexus for interest claims under Section 57(iii) and recognized the commercial use of property for Section 54F deductions.