2018 (5) TMI 242 - AT - Income Tax

Deduction of interest from house property income (rental income) - assessee had claimed deduction u/s 24 on account of interest payment - Held that - The same issue arose before the Tribunal in AY 2011-12 as held revenue erroneously restricted the claim of the assessee towards interest payable on the borrowed capital, only for the part of the year during which the property had remained in existence. We are persuaded to observe that if the legislature would have intended to restrict such a claim of the assessee, then the same would have specifically been provided for in the statute. We are thus of the considered view that the CIT(A) had erred in sustaining the order of the AO and thus misinterpreting the scope and gamut of Section 24(b), had wrongly disallowed 50% of the aforesaid Interest on borrowed capital - Decided in favour of assessee Disallowing set off of interest expenditure against interest income earned - whether direct and proximate nexus is established among surplus borrowed fund used for fixed deposit made from which interest income is earned - Held that - We set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make a fresh order after examining the contentions of the assessee. AO would examine the Fixed Deposit ledger account as well as Bank Book for the year under consideration as well as of preceding year. We direct the assessee to file the relevant documents/evidence before the AO. Disallowance of business loss - AO disallowed on the ground that the assessee has not done any business activity during the year under consideration and in the earlier years - Held that - It is found from the annual accounts that the assessee has claimed a deduction of ₹ 7,894/-. It represents expenditure on rates and taxes to the tune of ₹ 14,768/-. Out of the above sum, an amount of ₹ 6,876/- has been disallowed u/s 14A of the Act. We further find that the above expenditure claimed is towards maintaining existence of the company. In view of the above facts, we delete the disallowance

Summary

Issues:
1. Disallowance of interest expenditure claimed by the assessee.
2. Set off of interest expenditure against interest income earned.
3. Disallowance of business loss claimed by the assessee.

Issue 1: Disallowance of Interest Expenditure:
The appeal involved a disallowance of interest expenditure claimed by the assessee under the head 'Income From House Property'. The Assessing Officer (AO) denied the deduction under section 24 as the assessee did not have a house property but only an under-construction building. The AO found that the building was demolished, and the income was offered for only six months in the previous assessment year. The Commissioner of Income Tax (Appeals) upheld the AO's decision. However, the ITAT 'D' Bench Mumbai in a previous case for AY 2011-12 had allowed the deduction under section 24(b) even when the property ceased to exist during the year. The ITAT in the current case followed the previous decision and allowed the appeal, emphasizing that as long as the 'Annual Value' of a property can be determined, the claim for interest on borrowed capital should not be jeopardized.

Issue 2: Set Off of Interest Expenditure:
The second ground of appeal involved the set off of interest expenditure against interest income earned by the assessee. The AO treated the interest earned on bank Fixed Deposits (FDs) as 'Income from Other Sources' and brought it to tax, stating a lack of direct nexus between the funds parked in FDs and the business activity of the assessee. The Commissioner of Income Tax (Appeals) agreed with the AO's decision, stating that there was no borrowing for the purpose of earning interest. However, the ITAT found that the facts were not verified by the lower authorities. The ITAT set aside the CIT(A)'s order and directed the AO to reexamine the contentions of the assessee regarding the direct nexus between borrowed funds and interest income earned, emphasizing the need to verify Fixed Deposit ledger accounts and Bank Books.

Issue 3: Disallowance of Business Loss:
The third ground of appeal pertained to the disallowance of a business loss claimed by the assessee. The AO disallowed the loss as the assessee had not conducted any business activity during the relevant year. The CIT(A) upheld the disallowance. However, upon review, the ITAT found that the expenditure claimed was towards maintaining the existence of the company. The ITAT deleted the disallowance and allowed the third ground of appeal, emphasizing that the expenditure was justified for the company's existence.

In conclusion, the ITAT partially allowed the appeal, overturning the disallowance of interest expenditure and business loss while directing a reexamination of the set off of interest expenditure against interest income earned.