2023 (11) TMI 690 - AT - Income Tax

CIT revision order under section 263 set aside for interest deduction on rental income borrowings

The Manjri Stud Farm Pvt. Ltd. Versus ACTI – Central Circle – 2 (2) (2), Mumbai

The Manjri Stud Farm Pvt. Ltd. Versus ACTI – Central Circle – 2 (2) (2), Mumbai - TMI Issues Involved:1. Validity of the order under Section 263 of the Income-tax Act, 1961.2. Disallowance of interest expense under Section 24(b) of the Income-tax Act, 1961.3. Alternative claim of interest expense as business expenditure under Section 37 of the Income-tax Act, 1961.Summary:Validity of Order under Section 263:The Principal Commissioner of Income-tax (Pr.CIT) issued an order under Section 263 of the Income-tax Act, 1961, stating that the assessment order dated 25.12.2019 was erroneous and prejudicial to the interests of the revenue. The Pr.CIT noted that the assessee claimed a deduction under Section 24(b) without furnishing the necessary documentary evidence during the assessment proceedings. The Pr.CIT observed that the Assessing Officer (AO) did not make any further verification regarding the deduction claimed, thereby invoking the provisions of Section 263. The Pr.CIT directed the AO to conduct requisite enquiries and frame the order of assessment denovo.Disallowance of Interest Expense under Section 24(b):The assessee argued that the interest expense claimed under Section 24(b) was legitimate and supported by loan agreements and bank statements. The Pr.CIT, however, noted that the assessee did not provide an interest certificate from the bank, which is a requirement under Section 24(b). The Pr.CIT also observed that the loan agreements did not specify that the loans were for the acquisition or construction of properties generating rental income. The Pr.CIT held that the apportionment of interest costs between 'Income from House Property' and 'Income from Business' lacked legal sanctity.Alternative Claim under Section 37:The assessee alternatively claimed that if the interest expense was disallowed under Section 24(b), it should be allowed as a business expenditure under Section 37. The Pr.CIT rejected this claim, stating that the assessee did not provide supporting evidence to show how the loan was used for business activities generating other business income.Tribunal's Findings:The Tribunal observed that the third proviso to Section 24(b) is not applicable to the assessee, as it is relevant for individuals claiming deductions under Section 23(2). The Tribunal noted that the assessee is in the business of construction and letting of property, and it is common to borrow capital for overall business purposes and apportion the interest expense accordingly. The Tribunal found that the AO had collected information from the assessee but did not verify it in detail. However, the Tribunal held that the order was not prejudicial to the revenue, as the assessee had paid the relevant interest to the bank. Therefore, the twin conditions for invoking Section 263 were not satisfied. The Tribunal set aside the order passed under Section 263 and allowed the appeal filed by the assessee.Conclusion:The appeal filed by the assessee is partly allowed. The Tribunal set aside the order under Section 263, concluding that the conditions for invoking Section 263 were not satisfied, as the order was not prejudicial to the revenue.