Interest deduction on borrowed funds for building construction remanded after inadequate factual verification of the borrowing and fund use.

Interest expenditure claimed on borrowed funds used for construction of an assessee's building could not be finally disallowed where the factual basis of the borrowing, the role of the intermediary borrower, and the purpose of the funds had not been properly verified. The record was found inadequate for a merits determination because the lower authorities had not carried out sufficient enquiry into the transaction and supporting evidence. The disallowance was set aside and the matter was remitted to the Assessing Officer for fresh examination and decision in accordance with law after giving the assessee an opportunity of being heard.

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Issues: Whether the disallowance of interest expenditure claimed in relation to borrowed funds used for construction of the assessee's building was sustainable, or whether the matter required fresh verification.

Analysis: The claim was supported by the assessee on the basis that the borrowing was for construction of a building belonging to it and that the interest payment was evidenced by the record. The assessment record, however, showed that the lower authorities had not undertaken an adequate enquiry into the transaction, including the role of the intermediary borrower and the purpose of the funds. In the absence of proper verification of the factual foundation of the claim, the record was found insufficient for a final adjudication on merits.

Conclusion: The disallowance was set aside and the matter was remitted to the Assessing Officer for fresh examination and decision in accordance with law, after giving the assessee an opportunity of being heard.

Ratio Decidendi: A claim for deduction of interest expenditure cannot be finally adjudicated where the factual basis of the borrowing and its purpose has not been properly verified by the revenue authorities; such matters may be remanded for fresh consideration.

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