2024 (5) TMI 1243 - HC - Income Tax

Kerala HC upholds disallowance of interest expense under Section 36 for agricultural land purchase yielding exempt income

Kerala HC upheld disallowance of interest expense under Section 36 of Income Tax Act. Appellant claimed loan proceeds were used for business purposes, but ... Disallowance of interest expense - loan amount in question was used by the appellant for purchasing land which was an agricultural land and on which the appellant had cultivated tapioca - AO found that, in as much as the loan on which interest liability had arisen, was used for purchasing agricultural and earning agricultural income, the interest expense incurred on the loan amount availed could not be allowed as an expense u/s 36 since it was not used for business purposes - HELD THAT:- We find that there is no material produced by the appellant that would clearly suggest that the loan amount availed by it during the assessment year in question had been used for purchasing an asset, which it had used for the purposes of its business as a provider of asset management services. The evidence that was available before the authorities below clearly pointed to the acquisition of agricultural land valued at Rs.5,91,52,500/- and the earning of agricultural income through the sale of tapioca to the tune of Rs.1,93,540/- during the said period. Thus, notwithstanding the fact that the land in question was shown as a business asset in the balance sheet of the company, the fact remains that there was no evidence to show that the land was used for the purposes of the business of the assessee. As rightly noticed by the Tribunal in the impugned order, the evidence on record showed that the land in question was used for agricultural purposes, which yielded agricultural income, which in turn was exempt from income tax u/s 10(1) of the Income Tax Act. Admittedly, therefore, and in view of Section 14A of the IT Act, the expenses could not have been seen as incurred for the purposes of the business for the purposes of Section 36 (iii) of the IT Act. - Decided in favour of revenue. Issues:1. Disallowance of interest expense on long-term borrowings for purchasing agricultural land.2. Interpretation of Section 36(1)(iii) of the Income Tax Act.3. Application of Section 14A of the Income Tax Act.4. Assessment of expenses for business purposes.Analysis:The High Court of Kerala heard an appeal regarding the disallowance of interest expense on long-term borrowings by M/s. Mini Muthoot Credit India (P) Ltd. The assessing officer disallowed Rs.90,73,279/- of interest paid on a loan used to purchase agricultural land, as it was not considered a business expense under Section 36 of the Income Tax Act. The Commissioner of Income Tax (Appeals) found in favor of the appellant, stating the land was acquired for business purposes. However, the appellate tribunal noted that there was no evidence to prove the land was used for business activities, as it was primarily used for agricultural purposes, generating exempt agricultural income under Section 10(1) of the IT Act.The tribunal held that the interest paid on borrowings for agricultural land acquisition could not be deducted under Section 36(1)(iii) as it was not borrowed for business purposes but for acquiring exempt agricultural income. The court addressed the substantial questions of law raised, emphasizing the lack of evidence showing the loan amount was used for business purposes. Despite the land being listed as a business asset, the court found no proof of its business use, leading to the expenses being disallowed under Section 14A of the IT Act.The court upheld the tribunal's decision, ruling against the appellant and in favor of the revenue. The judgment highlighted the importance of establishing a direct nexus between borrowed funds and business activities to claim deductions under the Income Tax Act. The case serves as a reminder of the need for clear evidence supporting the business purpose of expenses to avoid disallowances under relevant tax provisions.