BANGALORE HOUSING DEVELOPMENT AND INVESTMENTS,BANGALORE vs. DCIT, BANGALORE

Facts apropos are that assessee engaged in real estate business had filed its return for the impugned assessment year declaring income of Rs.3,53,80,386/-. During the course of assessment proceedings it was noted by the AO that assessee had claimed interest of Rs.19,62,789/- paid on loans taken from LIC as an allowable expenditure. When asked to explain, submission of the assessee was that such loans were taken for remitting the insurance premium for its partnership insurance. Insurance premium was paid by the assessee firm for its six partners. AO was of the opinion that the insurance was taken by the assessee in the name of the partners based on an understanding between partners, embodied in a supplementary deed of partnership dated.01.02.2006 which inter alia stated that such insurance were being purchased with an express understanding to make the money available to the firm for settling claims of deceased partners. AO was of the opinion that insurance premium paid for partners’ insurance was not deductible as business expenditure u/s.37(1) of the Act. As per the AO, since such expenditure itself was not allowable under the Act there was no question of allowing any interest on loans taken for servicing the premium payments. Further as per the AO, there was no insurance payments effected by the assessee during the relevant previous year. AO also noted that assessee’s income during the impugned previous ITA.1027/Bang/2015 Page - 3 year was rentals of Rs.6,07,20,000/- from a let-out property, apart from a small commission of Rs.4,53,309/- received from a sister concern called, Canara Housing Development Co., Further as per the AO, policies taken were only normal policies of LIC called New Jeevanasri policies. Though the assessee pointed out that the Tribunal had in an earlier year held the insurance premium paid by the assessee on the policies in the name of the partners as an allowable expenditure, AO declined to follow that order on a reasoning that the Tribunal had relied on a judgment of Hon’be Bombay High Court in the case of CIT v. B. N. Exports (323 ITR 178) which was distinguishable on facts. He thus held that assessee’s claim for interest on LIC loans taken for servicing the payment of LIC premium could not be allowed. Disallowance of Rs.19,62,789/- was made.

In its appeal before the CIT (A) assessee once again relied on Tribunal orders in its own case for A. Ys. 2006-07, 2007-08 and 2008-09 wherein it was held that premium paid towards payment of partners’ policies were allowable as business expenditure. However, CIT (A) was of the opinion that these decisions could not be relied upon since during the relevant previous year there was no payment of any insurance premium. As per the CIT (A) when there was no premium paid, the question of ITA.1027/Bang/2015 Page - 4 allowing interest on loans taken for servicing such premium payments would not arise. He thus upheld the order of the AO.

Now before us, Ld. DR strongly assailing the orders of lower authorities submitted that the interest of Rs.19,62,789/- paid by the assessee was on a loan of Rs.1,85,86,750/-. As per the Ld. AR, the loan amount was carried forward from preceding year. Such loans taken in the earlier years were according to the Ld. AR, used for paying the insurance premium. As per the Ld. AR this Tribunal in assessee’s own case for A. Y. 2006-07 in dt.20.05.2010, as well as in ITA Nos.646 & 811/Bang/2012, dt.20.03.2013, for A. Ys. 2007-08 and 2008-09, held the insurance premium paid for partnership insurance as an allowable expenditure. As per the Ld. AR when this was an allowable expenditure, no way an interest paid on loans taken for servicing such insurance premium payment could be disallowed.

Per contra, Ld. DR supported the orders of the authorities below.

We have perused the orders and heard the rival contentions. No doubt the Tribunal in its orders in dt.20.05.2010, as well as in ITA Nos.646 & 811/Bang/2012, dt.20.03.2013 (supra) had held ITA.1027/Bang/2015 Page - 5 that claim of premium paid on partnership insurance, taken on the life of the partners of the assessee was an allowable expenditure. There can be no quarrel on this. However the question before us is whether interest on loans taken from LIC was allowable as an expenditure. As per the assessee, the said amount was used for remitting insurance premium towards the above referred partnership insurance and hence an allowable outgo. The interest amount does appear in its profit and loss account for the year31.03.2010. However, such Profit and loss account also shows that only income assessee had derived during the relevant previous year was rent only of Rs.6,07,20,000/- and commission and brokerage of Rs.4,53,309/-. Profit and loss account does not show any insurance premium paid during the relevant previous year. There is nothing on record to show that the insurance loan of Rs.1,85,86,750/- appearing in the balance sheet of the assessee as on 31.03.2010 was raised and utilised for the purpose of servicing the insurance premium due on the partnership insurance. Assessee had huge investments in land and building coming to Rs.75,61,80,150/-. Whether the loans taken were used for financing such assets has not been verified by any of the authorities below. We also find that substantial income of assessee’s income was assessable under the head ‘income from house property’. Or in other words, business, if any, done by ITA.1027/Bang/2015 Page - 6 the assessee was insignificant. So, the question that is to be answered whether there could be any allowance for interest on loans when there is no worthwhile business carried on. In our opinion, the facts and circumstances show that the issue requires a fresh look by the AO. We therefore set aside the orders of authorities below and remit the issue regarding allowance of interest on loans back to the file of the AO for consideration afresh in accordance with law.

In the result, appeal of the assessee is allowed for statistical purpose.