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2020 (8) TMI 151 - AT - Income TaxAddition of interest income - disallowance of interest income by not allowing proportional deduction of interest expenses - HELD THAT - AO himself has allowed the amortization of preliminary expenses which is always allowed upon commencement of business activities. Thus the assessee was not in pre-commencement period and set-off of interest income with interest expenses was claimed as allowable balance has been capitalized in the respective fixed assets. We also found that investment in interest earning advances were out of interest bearing funds borrowed by the assessee. In this regard, we observe that in AY 2008-09 in which the company was incorporated, the share capital was entirely utilized in investment of fixed assets and thereafter the subsequent borrowing were made either for purchase of more assets or in intervening period for advancing loans to other entities on which interest was earned. The assessee has also established nexus of interest paid with interest received i.e. utilisation of interest bearing borrowed funds into interest earning advances. There is no justification for disallowing interest expenditure so incurred. Even if the interest received by the assessee is treated as taxable under the head Income from Other Sources then still the deduction on a/c of interest paid by the assessee to the parties from whom the assessee taken loan and utilized to advance the money to persons from whom interest received should be allowed to the assessee. For computing the income taxed under the head Income from Other Sources u/s 56 of the Income tax Act the deduction of payment of interest made to earn such income should be allowed to the assessee as per provisions of section 57 (iii). Even otherwise also if it is presumed that the assessee did not commence its business operation and was under pre-commencement period than still in view of following case law the interest expenses should be allowed against interest earned in pre-commencement period. We confirm the detailed findings so recorded by the ld. CIT(A) which is as per materials placed on record, requiring no interference at our part. - Decided against revenue.
Issues Involved:
1. Disallowance of interest expenditure claimed by the assessee. 2. Confirmation of disallowance made under Section 14A of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Disallowance of Interest Expenditure: Facts and Background: The assessee, a company engaged in the business of renting immovable property, filed its original return of income on 29.09.2011, which was revised on 16.02.2012. The initial assessment was completed under Section 143(3) of the Income Tax Act, 1961, assessing the total income at ?12,59,504/-. Subsequently, the assessment was reopened under Section 147, resulting in an assessed total income of ?2,44,71,470/- due to disallowances, including ?2,35,68,701/- on account of interest income. CIT(A) Observations and Decision: The CIT(A) allowed the assessee's appeal, observing that the primary object of the assessee was to deal in immovable properties, and the business had commenced. The expenses, including interest, were therefore allowable against the business income. The CIT(A) noted that the assessee had filed a revised computation during the original assessment proceedings, re-categorizing rental income from "Income from Other Sources" to "Income from Business." This revised computation was accepted, indicating the commencement of business activities. Arguments: The Revenue argued that the CIT(A) wrongly deleted the disallowance, contending that the assessee had not shown any business income. The assessee countered that the interest expenditure was incurred for business purposes and should be allowed against the interest income. Alternatively, even if the interest income was taxed under "Income from Other Sources," the related expenditure should be allowed under Section 57(iii) of the Act. Tribunal's Analysis and Conclusion: The Tribunal considered the rival contentions and the records, noting that the assessee had commenced its business operations, as evidenced by rental income and the allowance of amortization of preliminary expenses by the AO. The Tribunal found that the investment in interest-earning advances was out of interest-bearing funds borrowed by the assessee, establishing a direct nexus between interest paid and interest received. Therefore, disallowing the interest expenditure was unjustified. The Tribunal cited several legal precedents, including decisions from the Supreme Court and various High Courts, supporting the allowance of interest expenditure against interest income, even if categorized under "Income from Other Sources." Consequently, the Tribunal confirmed the CIT(A)'s findings and directed the deletion of the addition of ?2,35,68,701/-. 2. Confirmation of Disallowance under Section 14A: The CIT(A) confirmed the disallowance made under Section 14A, and the assessee did not appeal this decision before the Tribunal. Conclusion: The Tribunal upheld the CIT(A)'s decision to allow the interest expenditure claimed by the assessee and dismissed the Revenue's appeal. The disallowance under Section 14A was confirmed, with no further appeal from the assessee on this issue. Order Pronouncement: The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 03/08/2020.
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