Appeal partially allowed on interest & income treatment in property sale.

The appeal was partially allowed in a case involving the addition of interest difference between borrowed and lent amounts and the treatment of income from the sale of flats. The court found that the interest difference should be considered in light of commercial expediency and remanded the matter for a fresh decision. Additionally, income from the sale of flats was correctly treated as business income due to the property being held for rental income purposes. The Assessing Officer was directed to compute long-term capital gains for the flats sold. The decision was pronounced on 19/12/2018 by the ITAT.

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Issues:
1. Addition of interest difference between borrowed and lent amount.
2. Treatment of income from the sale of flats as business income instead of capital gains.

Analysis:

Issue 1: Addition of Interest Difference
The appeal was filed against the order of CIT(A) sustaining the addition of the interest difference between the amount borrowed and lent by the assessee. The AO observed that the assessee obtained a loan from a bank and advanced it to a partnership firm, resulting in interest income. The AO disallowed the 2% difference in interest paid and added it to the assessee's total income. The firm's business showed consistent growth, justifying the need for additional funds. The assessing officer disallowed the interest difference based on the provisions of the Income Tax Act limiting partner interest to 12% while the loan was at 14%.

The assessee argued that the borrowing was due to the firm's limitations in borrowing directly from the bank, showing commercial expediency. The AR relied on legal precedents to support the deduction of interest paid. The ITAT found that the AO did not consider the commercial expediency aspect while disallowing the interest paid. The matter was remanded back to the AO for a fresh decision considering all aspects and in accordance with the law.

Issue 2: Treatment of Income from Sale of Flats
The second issue pertained to the treatment of income from the sale of flats as business income instead of capital gains. The property was purchased as an investment, developed, and rented out, reflecting as an investment in the balance sheet. The main income of the assessee was from a partnership firm. The property was let out to tenants, generating rental income taxed under the head of income from house property. Only a few flats were sold in the assessment years in question.

The ITAT analyzed the facts and concluded that the property was not held as stock in trade but was exploited to earn rental income. The gains from the sale of flats were rightly treated as business income. The AO was directed to compute long-term capital gains for the flats sold during the relevant year. The appeal was allowed in part, with the order pronounced on 19/12/2018.

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