What did the Tribunal hold?

The Tribunal upheld the CIT(A)'s decision, agreeing that the Assessing Officer was justified in restricting the interest deduction claim up to the date of conversion of the loan into an investment.

The assessee showed interest income and claimed interest payments on advances. The Assessing Officer disallowed interest deduction on funds diverted for acquiring a non-income yielding asset after a loan was converted into a secured site.

What were the issues?

Whether interest paid on funds diverted for acquiring a capital asset after conversion from a loan is allowable as a business expenditure.

V.K.R.S.V.Prasada Rao, Kakinada vs ITO | ITAT Visakhapatnam 2018

Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM

Before: SHRI V. DURGA RAO, HON’BLE & SHRI D.S. SUNDER SINGH, HON’BLE

For Appellant: Shri G.V.N. Hari – Advocate

For Respondent: Shri S. Ravi Shankar Narayan, Sr.DR

Hearing: 03/05/2018

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER ITA No. 289/VIZ/2016 (Asst. Year : 2008-09) V.K.R.S.V. Prasada Rao, vs. ITO, Ward-2, D.No. 2-19-3, Forest Office Kakinada. Road, Madhavanagar, Kakinada, E.G. District. PAN No. AATPV 0886 A (Appellant) (Respondent)

Assessee by : Shri G.V.N. Hari – Advocate. Department By : Shri S. Ravi Shankar Narayan, Sr.DR

Date of hearing : 03/05/2018. Date of pronouncement : 18/05/2018. O R D E R PER V. DURGA RAO, JUDICIAL MEMBER

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-2, Visakhapatnam, dated 11/03/2016 for the Assessment Years 2008-09. 2. Facts of the case, in brief, are that assessee is an individual, filed his return of income by declaring total income of Rs.3,55,930/-. The return filed by the assessee was processed under section 143(1) and thereafter assessment was completed under section 143(3) of the Income Tax Act, 1961 (hereinafter

2 ITA No.289/VIZ/2016 (V.K.R.S.V. Prasada Rao)

referred to as 'Act') by making addition of Rs. 5,35,346/-, which was added to the total income of the assessee. During the course of assessment proceedings, the Assessing Officer has noted that assessee has shown interest income of Rs. 9,88,684/- and interest payments of Rs. 11,85,065/- on advances made. The Assessing Officer has noted that the assessee has made advance to one M/s.S.S.M. Constructions and was deriving interest income upto August 2007. Subsequently, the said loan was converted into an asset by getting the secured site registered in the assessee’s favour on 24/10/2007 for Rs. 1,01,01,000/- including additional consideration paid. The Assessing Officer took the view that the interest bearing funds were diverted by the assessee for acquisition of non-income yielding asset and therefore restricted the claim of interest deduction by disallowing the interest at the rate of 12% on the advance from the date of conversion of site till 31/03/2008, which worked out to Rs. 5,35,346/- and added back to the total income of the assessee. 3. On appeal, ld. CIT(A) gave a categorical finding that the loan amount has been converted into an investment on 24/10/2007, therefore, the Assessing Officer is justified in restricting the claim of interest deduction upto the date of conversion and confirmed the order of the Assessing Officer.

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Ld. counsel for the assessee has submitted that the entire interest paid by the assessee has to be allowed as a business expenditure and submitted that the order passed by the Assessing Officer may be reversed. 5. On the other hand, ld. Departmental Representative strongly relied on the orders passed by the authorities below. 6. We have heard both the sides, perused the material available on record and orders of the authorities below. 7. The assessee has made advance to one M/s.S.S.M. Constructions and received interest income of Rs. 9,88,684/-. The assessee has received the interest only upto August, 2007 and subsequently, the said loan was converted into an asset by getting the secured site registered in the name of assessee on 24/10/2007 for consideration of Rs. 1,01,01,000/-, which includes payment of additional consideration. The Assessing Officer has disallowed the interest payment made by the assessee from the date of conversion i.e. August, 2007 to 31/03/2008 on the ground that investment made by the assessee is not for the purpose of business and is only for securing the asset, the same is confirmed by the ld. CIT(A) by observing as under:-

“4. The assessee is an individual having share income from firms which were engaged in construction activities. The assessee

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also derives income from leasing of furniture and generator. The assessee has admitted certain interest Income on certain advances made and has also claimed expenditure towards interest on borrowing. The AD noted that with regard to advance made to M/s. S.S.M. Constructions, the assessee had converted the loan on 24.10.2007 and purchased the secured asset. Therefore, the AO made disallowance on the claim of interest from the date of conversion at 12% as the interest bearing funds were utilized for investment purpose. Outing the appeal hearing the authorized representative contended the disallowance was not justified and relied on the decisions in the case of CIT vs. Insotex (P) Ltd., C.T. Desal vs. CIT. I have considered the submissions. Admittedly the loan amount has been converted into an investment on 24.10.2007, and therefore the AO is justified in restricting the claim of interest deduction up to the date of conversion. The case laws relied on by the authorized representative are distinguishable as explained by the AO in the Impugned order. Therefore the ND's action is upheld.”

In view of the above, we find no infirmity in the order passed by the ld. CIT(A). Thus, this appeal filed by the assessee is dismissed. 9. In the result, appeal filed by the assessee is dismissed. Order Pronounced in open Court on this 18th day of May, 2018.

Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated : 18th May, 2018. vr/-

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Copy to: 1. The Assessee – V.K.R.S.V. Prasada Rao, D.No. 2- 19-3, Forest Office Road, Madhavanagar, Kakinada, E.G. District. 2. The Revenue – ITO, Ward-2, Kakinada. 3. The CIT-2, Visakhapatnam. 4. The CIT(A)-2, Visakhapatnam. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.

V.K.R.S.V.PRASADA RAO,KAKINADA vs. THE ITO, KAKINADA

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