ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1(2)(2), BANGALORE vs. M/S THE SENATE , BANGALORE

Briefly stated, the facts of the case are as under :-

The assessee, a firm engaged in property development, civil constructions and other ancillary activities including renting of building, filed its return for Assessment Year 2010-11 on 31.10.2011 declaring total income of Rs.5,06,30,191. The case was taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction under Section 36(1)(iii) of the Income Tax Act, 1961 (in short 'the Act') of an amount of Rs.1,99,42,461 on account of interest paid on borrowings. The Assessing Officer disallowed the assessee's claim as a colourable device; observing that the above disallowance was made, even though the assessee's claim was allowed by the ITAT, Bangalore Bench’s order dt.29.8.2008 for Assessment Years 2001-02 & 2002-03, since the issue had not attained finality as the Department had not accepted the Tribunal order and was in further appeal against the same. On appeal, the learned CIT (Appeals) vide impugned order dt.8.9.2016 allowed the assessee's claim for deduction of interest on borrowings under Section 36(1)(iii) of the Act following the decision of the co-ordinate bench of this Tribunal in its order in dt.18.3.2016 for Assessment Year 2009- 10 and earlier assessment years in the assessee's own case.

For the assessment year 2009-10 (ITA No.1481/Bang/2013), the only issue involved is disallowance of interest on loans borrowed from Amarnath Co-op. Bank and Jammu-Kashmir Bank. The admitted facts on the issue are that this loan proceeds were utilized only for the purpose of repaying the earlier loans borrowed from Indian Bank etc., in the earlier assessment proceedings, interest on such loans was disallowed by AO on the ground that the loans were not utilized for business purpose. On further appeal before the ld.CIT(A), the same was confirmed. However, the Hon’ble Tribunal for the assessment year 2001-02 and 2002-03 in & 1203/Bang/2007 dated 29/8/2008, ITA Nos.538/Bang/2011 for assessment year 2002-03 and ITA No.587/Bang/2011 for assessment year 2005-06 dated 10/1/2014 held that the loan funds were utilized only for business purpose and therefore, directed the AO to allow interest. Since during the previous year relevant to assessment year under consideration, fresh loans were only utilized for the purpose of repaying old loans, the interest on new loans should be allowed as deduction as used only for business purpose following the earlier orders of the co-ordinate bench of the Tribunal. Hence, grounds of appeal filed for assessment year 2009-10 are allowed.”