Tribunal overturns disallowance of interest expenditure for business purpose under Income Tax Act

The Tribunal allowed the appeal, overturning the disallowance of interest expenditure amounting to Rs. 1,46,785 under section 36(1)(iii) of the Income Tax Act. The Tribunal found that the interest expenditure was incurred for business purposes as the property was purchased for business use, and the loan was taken from a co-owner of the property. The Tribunal noted that the property was a commercial space jointly purchased by the assessee and the co-owner, with proper documentation and tax compliance. The appeal was allowed in favor of the assessee on 31/08/2021.

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Issues:
Appeal against CIT(A) order disallowing interest expenditure u/s 36(1)(iii) of the Income Tax Act, 1961 incurred on money borrowed & invested for purchase of office premises.

Analysis:
The appeal was filed by the assessee against the CIT(A)'s order for the assessment year 2012-13, challenging the disallowance of interest expenditure under section 36(1)(iii) of the Income Tax Act, 1961. The assessee, engaged in the false ceiling business, had borrowed money for purchasing office premises. The AO disallowed expenses and interest expenditure claimed by the assessee, resulting in an assessed income of Rs. 22,34,146. The CIT(A) partly allowed the appeal, leading to the current appeal before the Tribunal solely on the disallowance of interest expenditure amounting to Rs. 1,46,785.

The assessee contended that the interest expenditure was incurred for business purposes as the property was purchased for business use, and the loan was taken from the brother who was a co-owner of the property. The books of accounts were audited, and tax was deducted at source on the interest. The assessee sought to prove the business nature of the interest expenditure by referring to documentary evidence and submissions made before the authorities.

The Departmental Representative supported the lower authorities' orders, arguing against the allowance of the interest expenditure. The Tribunal considered the contentions of both parties and examined the material on record. It was observed that the interest expenditure was claimed in the audited profit and loss account for the loan taken to purchase the office premises. The property was a commercial space jointly purchased by the assessee and the brother, with payments made through banking channels.

The Tribunal noted the CIT(A)'s concerns regarding the classification of the property as an investment and the lack of documentary evidence proving the brother's ownership of the property. However, the Tribunal found merit in the assessee's arguments, emphasizing that the business address was at the purchased property, and the property investment was duly recorded in the books. The Tribunal also highlighted that tax was deducted at source on the interest expenditure, with verifiable details provided in the paper book.

Based on the facts and circumstances, the Tribunal held that the interest expenditure of Rs. 1,46,785 was rightfully claimed as a business expenditure, paid on the loan taken for business purposes. Consequently, the disallowance of interest expenditure under section 36(1)(iii) was set aside, and the appeal of the assessee was allowed. The other grounds raised in the appeal were considered general in nature and did not impact the decision.

In conclusion, the Tribunal pronounced the order in favor of the assessee on 31/08/2021, allowing the appeal against the disallowance of interest expenditure incurred on money borrowed and invested for the purchase of office premises.

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