Tribunal affirms deduction of interest expenses for closely held company under Income Tax Act

The Tribunal upheld the Commissioner of Income Tax (Appeals)-1, Rajkot's decision allowing the assessee's claim of interest expenses under section 24(b) of the Income Tax Act, 1961. The Revenue's appeal was dismissed, affirming that the interest expenses claimed by the closely held company engaged in leasing out shops and malls were sustainable in law as the borrowed funds were used to repay a liability related to construction, qualifying for deduction under section 24(b).

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Issues Involved:
1. Disallowance of interest expenses claimed under section 24(b) of the Income Tax Act, 1961.

Judgment Summary:

Issue: Disallowance of Interest Expenses under Section 24(b) of the Income Tax Act, 1961

The Revenue filed an appeal against the order of the Commissioner of Income Tax (Appeals)-1, Rajkot, which allowed the assessee's claim of interest expenses amounting to Rs. 7,28,00,166/- under section 24(b) of the Income Tax Act, 1961. The assessee, a closely held company engaged in leasing out shops and malls, claimed interest expenses on borrowings used for acquiring/constructing properties. The Assessing Officer (AO) disallowed the claim, arguing that the funds were used for repaying an outstanding liability to a party, not directly for construction.

The CIT(A) allowed the claim, noting that the borrowing was used to repay a liability related to the construction of a mall, thus qualifying for deduction under section 24(b). The Revenue contended that the interest was paid on a loan used to repay another loan, which is not allowable under section 24(b). The assessee countered by citing various judicial decisions supporting the claim that section 24(b) does not exclude interest on loans taken to repay original construction loans.

The Tribunal examined the facts and found that the loan was indeed used to repay a liability for construction, not another loan. The Tribunal upheld the CIT(A)'s decision, stating that the interest paid on such a loan is allowable under section 24(b). The Tribunal dismissed the Revenue's appeal, affirming that the interest expenses claimed by the assessee are sustainable in law.

Conclusion:
The appeal of the Revenue was dismissed, and the interest expenses claimed by the assessee under section 24(b) of the Income Tax Act, 1961, were held to be allowable.

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