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Facts
The assessee, a private limited company, claimed a finance cost as business expense, but the AO disallowed it because there was no business activity and the underlying loans were used to acquire an asset generating rental income and other interest income. The AO also denied the assessee's alternative plea to set off interest expenses against income from house property or other sources. The CIT(A) upheld the AO's disallowance.
Held
The Tribunal observed that the AO denied the alternative claim without factually examining the nexus between the interest expenses and the income from house property or other sources. Therefore, the case was remitted back to the AO to re-examine the claim on merits, establish the necessary nexus, and allow the deduction as per law after providing the assessee a reasonable opportunity of being heard.
Key Issues
Whether interest expenses incurred for assets generating rental income or other interest income can be allowed as a deduction against 'Income from House Property' or 'Income from Other Sources', even if not claimed in the original return, and the AO failed to establish the nexus.
Sections Cited
250, 37, 271(1), 24, 57
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Income Tax Appellate Tribunal, “J (SMC
Before: SHRI ANIKESH BANERJEE, JM &
(Assessment Year: 2016-17) Ram Rama Products PVC Pvt. Ltd. ITO-Ward-13(3)(1), 1703, Lilivm Mahindra Garden, Aayakar Bhavan, M.K. Road, Vs. Goregaon West, Mumbai-400062. Churchgate, Mumbai-400020. PAN: AAGCR9741J Appellant) : Respondent) Appellant /Assessee by : Shri Vijay Kumar Biyani, AR Revenue / Respondent by : Shri Mukesh Thakwani, Sr. DR Date of Hearing : 06.05.2025 Date of Pronouncement : 22.05.2025 O R D E R Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre, (NFAC) Delhi [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 28.11.2024 for AY 2016-17. The assessee raised the following grounds of appeal:
“1. The Learned CITIA) has erred in disallowing interest expenses of INR 39,92,721/- out of business expenses and further erred in not allowing alternative claim in respect of Interest expenses against income from house property and income from other sources in spite of agreeing to the contention if the assessee as to relationship of such interest expenses with income from house property and proof given in respect of borrowing having been partly utilized for earning interest income.
The appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal
, at any time before or at the time of hearing of the appeal so as to enable to learned Commissioner (Appeal) to decide the appeal according to law.”
2. The assessee is a private limited company and filed the return of income for AY 2016-17 on 14.10.2016 declaring a loss of Rs. 2,23,114/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. The Assessing Officer (AO) noticed from the perusal of the balance-sheet that the assessee has advanced loans to the tune of Rs. 1,40,85,748/- on which the assessee has received interest to the tune of Rs. 17,55,729/-. The AO further noticed that the assessee has claimed a finance cost of Rs. 39,96,141/- and that the assessee did not have business activity during the year under consideration. The AO also noticed certain discrepancies in the rental income offered by the assessee during the year under consideration. The assessee submitted that the borrowings of the assessee are utilized for the purpose of purchase of Shed at Bhimpore (Daman) to be used for business purposes. The assessee further submitted that since the business of the assessee did not take off the Shed was rented out for a total lease rent of Rs. 39,87,500/- which is reflected in the Profit & Loss A/c. The assessee also submitted that since there is a direct nexus between the income offered and the interest paid thereon the same should be allowed as deduction. The AO did not accept the submissions of the assessee and proceeded to disallow the entire interest expenses. The relevant findings of the AO in this regard are extracted below:
“The huge interest expenses are incurred for creating assets in the form of house property and by letting out the said assets the assessee has earned huge rent income. Therefore, the interest expenses have no relation with the business and earning of interest income. As per Section 37 any expenditure laid out or expended wholly and exclusively for the purpose of the business shall be allowed in computing the income chargeable under the head "Profits and Gains of Business". Therefore, the above interest expenses are not Ram Rama Products PVC Pvt. Ltd. allowable to the assessee against business income. These interest expenses are not allowable against the interest income as these expenses are not laid out and expended wholly and exclusively for the purpose of earning interest income. The interest expenses are incurred on bank loans and the said loans were meant for purchase of assets meant for business but the same was not utilized for business purposes. Regarding the contention, alternatively, that the interest expenses should be allowed against House Property Income is not considered as the assessee itself not claimed the said expenses in the return of income and declared the House Property Income without claiming interest expenses. In view of these facts and as per law the interest expenses claimed by the assessee is not admissible against Income from Other Source and Income from Business and hence the claim of the assessee is disallowed and the interest expenses claimed of Rs.39.92.721/- is added to the total income of the assessee. Penalty proceedings u/s.271(1) are initiated separately for furnishing inaccurate particulars of income.”
The CIT(A) on further appeal confirmed the disallowance made by the AO. The assessee is in appeal before the Tribunal against the order of CIT(A).
The ld. AR submitted that the assessee during the course of assessment proceedings made an alternate plea that the interest paid by the assessee should be allowed to be set off against the Income from House Property and the Income from Other Sources. The ld. AR further submitted that the AO did not consider the above alternate plea of the assessee and has disallowed the entire interest. The ld. AR accordingly prayed that the appeal may be set-aside to the AO for considering the alternate plea of the assessee.
The ld. DR on the other hand supported the order of the lower authorities.
We heard the parties and perused the material on record. The ld. AR during the course of hearing drew our attention to the revised computation containing the alternate plea of the assessee as extracted below:
From the perusal of the AO's findings as extracted in the earlier part of this order we notice that the AO has disallowed the entire interest against the Business Income of the assessee for the reason that the interest payment has no relation with business of the assessee. We further notice, while holding so the AO though has admitted the fact that the interest expenditure is incurred for buying the property from which rental income is received, denied the deduction for the reason that the assessee in the return of income has not made any such claim. Therefore in our Ram Rama Products PVC Pvt. Ltd. considered view there is merit in the claim of the assessee that the interest to the extent attributable to earning of rental income should be allowed as a deduction from Income From House Property and the deduction cannot be denied merely for the reason that the assessee has not made the claim. One more claim of the assessee is that a portion of interest expenses should be allowed a deduction under section 57 against the interest income earned. This is denied by the AO for the reason that the assessee has not established the nexus and that it is not proved that the interest expenses are incurred wholly and exclusively for earning interest income. From the facts discussed herein above, it is clear that the AO has denied the interest deduction from Income from House Property and Income from Other Sources, without factually examining the claim of the assessee regarding the nexus with the income earned from these sources. Therefore, in the interest of justice and fair play, we are remitting the appeal back to the AO to examine the said claim of the assessee on merits. The AO is directed to call for the necessary details substantiating the claim regarding the nexus of the income earned with interest paid and allow the claim in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.
In result, appeal of the assessee is allowed for statistical purposes.