2019 (11) TMI 802 - AT - Income Tax

Claim of deduction of the interest paid to DHFL and its associate concern on such borrowed funds which were invested with its associate concerns under Sec. 57(iii) - HELD THAT - As long as it is established that the Interest paid by the assessee on the loans raised from DHFL as per the mandate of Sec. 57(iii) was an expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning of the Interest income from the associate concerns to whom interest bearing loans were given, then such Interest paid would be eligible for deduction against the Interest received by the assessee company. As the factual position as to whether the assessee satisfies the requisite conditions envisaged in Sec. 57(iii), therein making it eligible to claim deduction of the Interest paid on the loans raised from to DHFL against the Interest income received from the associate concerns to whom interest bearing loans were given cannot be safely gathered from the records before us, and would require verification, therefore, the matter in all fairness is restored to the file of the A.O - A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its claim as regards its eligibility towards claim deduction under Sec. 57(iii) of the Act Entitlement of the assessee towards claim of deduction of interest paid on the loan raised from its associate concern - HELD THAT - A.R has filed before us a Chart , wherein it is claimed that the interest bearing loan received from M/s Skylark Buildcom Private Limited was advanced by way of interest bearing loans to its associate concerns during the year under consideration. As the claim of the assessee requires to be verified in the backdrop of the facts projected in the Chart filed by the assessee before us, therefore, in all fairness we restore the matter to the file of the A.O. The A.O is directed to verify the veracity of the claim of the assessee that the amount received by it as interest bearing loans from M/s Skylark Buildcom Private Limited was utilised for providing interest bearing advances to its associate concerns. In case the aforesaid claim of the assessee is found to be in order and as per the mandate of Sec. 57(iii), then the A.O shall allow deduction of the Interest paid by the assessee to M/s Skylark Buildcom Private Limited against the correlating Interest income received by it from its associate concerns Claim of expenses viz. other expenses and amortization expenses against the Interest received - HELD THAT - As observed by us hereinabove, as the said expenses had not been incurred by the assessee for earning of Interest income , therefore, the same would not fall within the realm of the deductions envisaged in Sec. 57(iii) of the Act. Accordingly, finding no infirmity in the order of the CIT(A), we uphold the disallowance of the aforesaid expenses. Resultantly, in terms of our aforesaid observations the matter is restored to the file of the A.O. As observed by us hereinabove, the A.O shall in the course of the set aside proceedings, after making necessary verifications, as he may deem fit,

Issues Involved:
1. Determination of whether the interest income received by the assessee on the amounts advanced to its associate concerns is to be assessed as 'business income' or 'income from other sources'.
2. Eligibility of the assessee for claiming deduction of the interest paid on the amounts borrowed from DHFL and its associate concern as per Section 36(1)(iii) under the head 'income from business'.
3. Alternative claim for deduction of the interest paid under Section 57(iii) if the interest income is assessed under the head 'income from other sources'.
4. Verification of whether the project for which the loan was raised belongs to the assessee or its associate concern.
5. Verification of the correctness of the interest capitalized by the assessee.
6. Verification of the interest-bearing loans received from M/s Skylark Buildcom Private Limited and their utilization.

Detailed Analysis:

Issue 1: Assessment of Interest Income
The assessee contended that the interest income received from advances to its associate concerns should be considered as 'business income' since it was part of its systematic business activities. However, the Tribunal noted that the main business of the assessee was to carry on the business of a builder, developer, and trader in properties, which had not yet commenced. The incidental objects of lending and advancing money could not be considered in isolation. Hence, the interest income was rightly assessed under the head 'income from other sources'.

Issue 2: Deduction of Interest Paid under Section 36(1)(iii)
The Tribunal observed that since the business of the assessee had not commenced, the interest paid on the loans raised from DHFL and its associate concern could not be allowed as a deduction under Section 36(1)(iii). The interest expenditure was to be capitalized as a pre-operative expense and would be allowed as a deduction only after the commencement of the business and inflow of revenue from the project.

Issue 3: Deduction of Interest Paid under Section 57(iii)
The Tribunal considered the alternative claim of the assessee for deduction of the interest paid under Section 57(iii). It was noted that for the interest expenditure to be deductible under Section 57(iii), it must be laid out or expended wholly and exclusively for the purpose of making or earning the interest income. The Tribunal directed the Assessing Officer (A.O) to verify whether the conditions under Section 57(iii) were satisfied, i.e., whether there was a direct nexus between the borrowed funds and the interest-bearing advances given to associate concerns.

Issue 4: Verification of Project Ownership
The Tribunal noted the claim of the assessee that the project for which the loan was raised belonged to its associate concern, M/s Sigtia Construction Pvt. Ltd., and not to the assessee. The A.O was directed to verify this claim by examining the records of the assessee and M/s Sigtia Construction Pvt. Ltd., as well as conducting necessary verifications from DHFL, Slum Rehabilitation Authority, and the Municipal Authority of Greater Mumbai.

Issue 5: Verification of Interest Capitalization
The Tribunal observed that the CIT(A) had concluded that the assessee had suppressed the quantum of interest paid that was relatable to the amount given towards its capital asset commitment. The A.O was directed to verify the correctness of the interest capitalized by the assessee after providing an opportunity to the assessee to substantiate its claim.

Issue 6: Verification of Loans from M/s Skylark Buildcom Private Limited
The Tribunal directed the A.O to verify the claim of the assessee that the interest-bearing loans received from M/s Skylark Buildcom Private Limited were advanced as interest-bearing loans to its associate concerns. If verified, the interest paid on these loans would be allowed as a deduction under Section 57(iii) against the interest income received from the associate concerns.

Conclusion:
The appeals were partly allowed for statistical purposes, with directions for the A.O to carry out necessary verifications and adjudicate the issues afresh based on the findings. The Tribunal emphasized the need for a thorough verification process to determine the correct tax treatment of the interest income and the eligibility of interest deductions under the relevant sections of the Income Tax Act.

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