2021 (6) TMI 189 - AT - Income Tax

Addition made towards interest expenses claimed - case was selected for scrutiny under CASS - purchase of its business assets (land building, Plant and Equipment and Furniture Fixtures) - CIT(A) observed that the assessee derived income from letting out the properties i.e. rental income, which has been shown as income from operations in the P L Account and since the assessee has recognized revenue from operation and the same has been offered to tax, the AO is not justified in making the said disallowance - HELD THAT - Assets have been leased by the assessee and income in the form of rental and maintenance charges have been credited to Profit and Loss and accordingly offered to tax. As the interest expenses incurred on the borrowing which are utilized for acquiring the assets, income derived from which is credited to P L account and offered to tax. There is a direct nexus between the income offered and the expenditure claimed. CIT(A) considering the facts of the case of the assessee, directed the AO to delete the disallowance made towards interest paid. We do not find any reason to interfere with the order of the CIT(A) and upholding the same, we dismiss the ground raised by the revenue on this count. Appeal of the revenue is dismissed.

Summary

Issues: Appeal against CIT(A) order deleting addition made towards interest expenses claimed by the Revenue under section 143(3) of the Income Tax Act, 1961.

Analysis:
1. The case involved an appeal filed by the Revenue against the CIT(A) order concerning proceedings under section 143(3) of the Income Tax Act, 1961. The Revenue's grievance was that the CIT(A) erred in deleting the addition made towards interest expenses claimed without appreciating the need for capitalization.

2. The assessee, engaged in hospital construction, filed its return of income admitting a loss. The Assessing Officer (AO) observed that the assessee had paid interest on Compulsory Convertible Debentures (CCDs) and debited the interest expenditure against rental income. The AO disallowed the interest amount, stating that since the debenture subscription amount was capitalized, the interest incurred on it should also be capitalized.

3. The CIT(A), after considering the submissions, noted that the assessee derived income from letting out properties as rental income, which was shown as income from operations. As the revenue from operations was recognized and offered for tax, the CIT(A) held that the disallowance of interest amount by the AO was not justified and directed to delete it.

4. The Revenue, aggrieved by the CIT(A) order, appealed before the ITAT. The ITAT considered the submissions and material on record. The assessee had issued CCDs against which it received funds utilized for purchasing business assets. The income derived from these assets was credited to the Profit and Loss account and offered for tax. The ITAT found a direct nexus between the income offered and the expenditure claimed, upholding the CIT(A) order to delete the disallowance of interest expenses.

5. Ultimately, the ITAT dismissed the appeal of the Revenue, affirming the decision to delete the addition made towards interest expenses claimed by the assessee. The judgment was pronounced on 9th April 2021.