2021 (12) TMI 876 - AT - Income Tax

Tribunal upholds deduction of interest expenses in capital gain computation. Disallowances deleted for lack of verification.

Deputy Commissioner of Income Tax, Corporate Circle-1 (2) Chennai Versus M/s Balaji Hotels & Enterprises Limited

Deputy Commissioner of Income Tax, Corporate Circle-1 (2) Chennai Versus M/s Balaji Hotels & Enterprises Limited - [2022] 94 ITR (Trib) 24 (ITAT [Chen]) Issues Involved:1. Deduction of interest expenses on loan taken in computation of capital gain.2. Deletion of disallowances of interest expense and other revenue expenditure without proper opportunity for AO to verify additional evidence.Issue-wise Detailed Analysis:1. Deduction of Interest Expenses on Loan Taken in Computation of Capital Gain:The Revenue appealed against the order allowing the deduction of interest expenses on loans in the computation of capital gain. The Assessing Officer (AO) disallowed Rs. 41,24,11,072/- of interest paid on loans, arguing it was not included in the cost of acquisition. The assessee contended that this amount was part of the cost of acquisition, not an expenditure incurred wholly and exclusively in connection with the transfer. The interest was on loans from ICICI, cumulative from FY 1996-97, and capitalized as work-in-progress for the commercial project. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed this deduction, noting that the interest expenses were capitalized and not claimed as revenue expenditure. The Tribunal upheld CIT(A)'s decision, finding no infirmity in the order and confirming that the interest expenses were correctly included in the cost of acquisition.2. Deletion of Disallowances of Interest Expense and Other Revenue Expenditure Without Proper Opportunity for AO to Verify Additional Evidence:The Revenue argued that CIT(A) deleted the disallowances without giving the AO proper opportunity to verify additional evidence, violating Rule 46A. The AO had disallowed Rs. 35,40,00,000/- of revenue expenditure, claiming it should be treated as capital expenditure. The assessee explained that the interest expenses were capitalized and not claimed as revenue expenditure since business operations had not commenced. The CIT(A) reviewed the final accounts from FY 1997-98 to 2007-08 and found that the interest was shown as 'expenditure pending allocation' and not debited to the Profit and Loss Account. The Tribunal noted that the CIT(A) had called for a remand report from the AO, who did not provide explanations regarding the disallowance. The Tribunal found no new evidence was placed before the CIT(A) and upheld the deletion of the disallowance, confirming that the CIT(A) acted correctly and the disallowance was untenable.Conclusion:The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on both issues. The interest expenses were correctly included in the cost of acquisition and not claimed as revenue expenditure, and the deletion of disallowances was upheld as the AO had been given sufficient opportunity to verify the evidence. The order was pronounced on December 8, 2021, in Chennai.