Interest nexus and apportionment between house property and business income allowed on construction-related borrowings.

Interest on borrowed funds used for construction-related liabilities was held to retain a sufficient nexus with the property investment, so it could not be disallowed in full under section 24(b). The borrowing chronology and the assessee's use of fresh funds to repay earlier construction creditors supported only partial allowance, and the interest had to be apportioned between house property income and business income on the basis of the respective investments. The circular relied on by the Revenue did not defeat the claim once nexus was established, and the balance interest remained deductible as business interest.

---

---

Issues: Whether the interest paid on the loan borrowed from Axis Bank Ltd. was allowable under section 24(b) of the Income-tax Act, 1961, and, if not wholly so, how the interest was to be apportioned between house property income and business income.

Analysis: The assessee had constructed the project with borrowed funds, converted the unsold stock into investment, and later borrowed fresh funds to repay earlier creditors connected with the construction. The record showed a sufficient nexus between the borrowing and the repayment of the earlier construction-related liabilities. The AO's own working also indicated that the interest burden had to be split between Block A and Block B on the basis of the respective investments, and the transaction chronology supported partial allowance of the interest claim. The circular relied upon did not defeat the claim once the requisite nexus was established.

Conclusion: The interest could not be disallowed in entirety. The assessee was entitled to allowance of the interest in the prescribed proportion, with the balance treated as business interest deductible against business income.

---