KALPANA N JAIN,MUMBAI vs. ITO WD 15(2)(2), MUMBAI

In this appeal, assessee has contested the disallowance of interest expenditure of Rs.2,52,000/- and Rs.2,57,058/- claimed while computing the income from house property and business income respectively.

In brief, the relevant facts are that assessee individual filed her return of income for assessment year 2008-09 declaring a total income at Rs.38,850/-, which was subject to scrutiny assessment, whereby the total income has been assessed at Rs.6,43,270/-. In the return of income assessee declared salary income as a director of a concern, house property income from a let-out property as well as self-occupied property and also business income by way of loans from proprietary concern, share of profit from the partnership firm M/s. Plastika Enterprises and interest on capital with the said firm M/s. Plastika Enterprises apart income from other sources. The Assessing Officer noticed that assessee had earned interest from banks and other concerns and was also paying interest borrowings from certain individuals, the net effect was an outflow of Rs.5,09,058/- on account of interest. In the return of income, assessee allocated the aforesaid outflow towards the rental income – Rs.2,50,000/- and the balance with respect to the contribution to capital invested in the partnership firm M/s. Plastika Enterprises and in the proprietary concern, Just Right - Rs.2,57,058/-. The aforesaid deductions claimed while computing income from house property and business income respectively have been denied by the lower authorities, against which, assessee is in appeal before the Tribunal.

With respect to the deduction of Rs.2,52,000/- claimed against the rental income from the property at Gita Industrial Estate, it has been pointed out by the Ld. Representative for the assessee that the said property was acquired by the assessee in assessment year 1999- 2000 by raising an interest free an loan from M/s. Plastika Enterprises, a partnership firm. It was pointed out that subsequently in assessment year 2001-02 assessee raised interest bearing loans, which were utilized to repay the interest free loan taken from M/s. Plastika Enterprises for acquisition of property. The Ld. Representative for the assessee pointed out that in assessment year 2001-02, assessee had claimed deduction of interest paid on borrowed funds while computing the income under the head house property, which stood allowed in an assessment finalized under section 143(3) of the Act dated 31/01/2003. Similarly, it is pointed out that in assessment year 2003-04 also such interest payment stood allowed in the assessment made under section 143(3) of the Act. Under these circumstances, it is pointed out that the lower authorities are not justified in making the impugned disallowance.

On the other hand, Ld. Departmental Representative pointed out that there was no evidence to prove that the property acquired was out of borrowed funds, therefore, the claim has been rightly denied.

We have carefully considered the rival submissions and find no justification to sustain the disallowance of Rs.2,52,000/- representing interest expenditure. Quite clearly, in the earlier years similar expenditure has been allowed as a deduction against the rental income earned from letting out of the property in terms of section 24(b) of the Act. Following the earlier orders, and in the absence of any change in facts or law brought out by the Revenue, it is directed that the deduction of Rs.2,52,000/- on account of interest be allowed against the rental income. Thus, on this aspect assessee succeeds.

The other issue is with regard to a claim for deduction of interest of Rs.2,57,058/- while computing the business income. It has been pointed out that the said expenditure is incurred for borrowing deployed in the capital of the partnership firm M/s. Plastika Enterprises as well as the capital used in the proprietary concern. In this context, it was pointed out that during the year assessee had earned interest on capital deployed in the partnership firm at Rs.1,98,578/- and that so far as the share of profit from the partnership firm is concerned, there has been a loss of Rs.1,13,085/- during the year. It is pointed out that such loss has been excluded while computing the total income and, therefore, no exempt income has been earned from the partnership firm. On this aspect, we find that the lower authorities have not advanced any credible reason to deny the claim of the assessee, which is hereby directed to be allowed. Thus, on this aspect also assessee succeeds.

In the result, appeal of the assessee is allowed.