Interest Disallowance Deleted as Property Purchases Funded Separately: Delhi ITAT

Pankaj Shukla Vs ITO (ITAT Delhi)

Summary: This appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeal)-2, Gurgaon dated 30.10.2019 for assessment year 2016-17. The solitary issue raised in the appeal concerned disallowance of interest expenditure of Rs.3,11,520/-.

The assessee was engaged in the business of manufacturing, trading and export of woolen carpets and enjoyed credit limits from the bank on which interest was paid. During the relevant period, the assessee made investments for acquiring properties, including payment for purchase of a flat to Lilac Infracon P. Ltd. and payment of advance for booking a flat with Panorma.

Before the Tribunal, the assessee submitted that the payment relating to Lilac Infracon Pvt. Ltd. included a home loan of Rs.1,14,51,369.40 obtained from ICICI Bank, out of which Rs.83,65,852.00 was paid from the ICICI Loan Account. Interest of Rs.85,517.40 charged by ICICI Bank was also debited to the party account and was not debited to the Interest Account claimed in the Profit and Loss Account. A further amount of Rs.30,00,000.00 was stated to have been paid out of own funds.

In respect of Panorama, Mumbai, the assessee submitted that Rs.27,36,000.00 was paid as booking advance for a flat out of own funds. The assessee contended that the interest expenditure of Rs.3,11,520/- claimed in the P&L account related to credit facilities utilised wholly and exclusively for business purposes and did not relate to the property investments.

The Assessing Officer had disallowed the interest expenditure on the ground that the assessee had diverted funds for non-business purposes. The CIT(A) confirmed the disallowance. The assessee challenged that decision before the Tribunal.

The Department defended the orders of the lower authorities and submitted that the disallowed interest expenditure was unrelated to the business of the assessee.

The Tribunal examined the orders of the authorities below and the bank interest ledger account referred to by the assessee. It noted that interest expenditure of Rs.1,04,33,985/- claimed in the P&L account was also reflected in the ledger account and related to three Bank of Baroda accounts.

The Tribunal further noted that the assessee had taken the home loan for purchase of flats at Panorama and Lilac Infracon P. Ltd. from ICICI Bank Ltd. It observed that it was not emanating from the accounts furnished by the assessee that the interest expenditure claimed in the P&L account included interest paid to ICICI Bank Ltd.

Finding merit in the assessee’s submissions, the Tribunal deleted the disallowance of interest expenditure of Rs.3,11,520/-. Consequently, the impugned order was set aside and the appeal of the assessee was allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeal)-2, Gurgaon (hereinafter referred to as ‘the CIT(A)’) dated 30.10.2019, for assessment year 2016-17.

Shri Navin C. Agrawal, appearing on behalf of the assessee submits that the solitary issue raised by the assessee in appeal is with regard to disallowance of interest expenditure Rs.3,11,520/-.

2.1 Narrating facts of the case, he submitted that the assessee is engaged in the business of manufacturing, trading and export of woolen carpets. The assessee enjoys credit limit from the bank and paid interest on credit against the limits. During the period relevant to assessment year under appeal, the assessee made investments for acquiring following properties:-

(i) Payment for purchase of flat to Lilac Infracon P. Ltd.; &

(ii) Payment of advance for booking flat with Panorma.

The ld. Counsel submitted that, as regards payment to Lilac Infracon Pvt. Ltd. Home Loan Rs. 1,14,51,369.40 was obtained by the assessee from ICICI Bank and payment of Rs. 83,65,852,00 was made out of the ICICI Loan Account. Interest accrued on Home Loan amounting to Rs.85,517.40 was also debited to party account. Thus, the interest on Home Loan account was not debited to Interest Account claimed in Profit and Loss Account. Besides Rs. 30,00,000.00 were paid out of own funds. With respect to payment to Panorama, Mumbai he stated that Rs. 27,36,000.00 was paid as booking advance for a flat at Mumbai. Money was paid out of own fund.

2.2 The AO has erred in holding held that interest expenditure of Rs.3,11,520/- debited to P&L account is not allowable expenditure as the investments are for non business purposes. Aggrieved by the assessment order dated 21.11.2018 passed u/s. 143(3) of the Income Tax Act, 1961(hereinafter referred to as ‘the Act’), the assessee filed appeal before the CIT(A). The CIT(A) without appreciating facts of the case confirmed the disallowance. He contended that the assessee had paid Rs.27,36,00,000/- as booking advance for Panorma flat at Mumbai. The money was paid through Bank of Baroda out of own funds. Likewise, investment in Lilac Infracon P. Ltd. Rs.1,14,51,369.40/- was made from the following sources:-

The interest on above housing loan has not been charged to P&L account. This fact was repeatedly brought to the notice of AO during assessment proceedings on 01.03.2018, 16.07.2018 and 12.10.2018. However, the AO erred in disallowing interest expenditure on the premise that the assessee has debited interest expenditure in respect of above mentioned properties in the P&L account. The bank interest charged to P&L account Rs.1,04,33,985.96/- is with respect to credit facilities utilized wholly and exclusively for the business purposes. He referred to Schedule ‘O’ of Bank Interest and Charges reflected at page 17 of the paper book and the Ledger Account at page 18 of the paper book. Both the authorities below have failed to record the facts correctly. He thus prayed for deleting disallowance made on account of interest expenditure.

3. Shri Om Prakash, representing the department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. The ld. DR submits that the interest expenditure disallowed by the AO and confirmed by the CIT(A) is unrelated to the business of the assessee, hence, the same was disallowed.

4. Both sides heard, orders of the authorities below examined. The short issue for consideration before the Tribunal is with regard to disallowance of expenditure Rs.3,11,520/-. The AO has disallowed aforesaid interest expenditure holding that the assessee has diverted funds for non business purposes.

5. The stand of assessee is that the interest expenditure claimed in P&L account is exclusively for the purpose of business. In so far as interest expenditure towards investment in Panorama and Lilac Infracon P. Ltd. the same are not debited to P&L account. In support of his submissions the assessee has also referred to bank interest ledger account at page 18 to 20 of the paper book. A perusal of ledger account reveals that the interest expenditure of Rs.1,04,33,985/- as claimed in the P&L account is also reflected in the ledger account. The interest expenditure reflected in the ledger is in respect of three accounts as under:-

Whereas, the assessee has taken Home Loan for purchase of flats at Panorama and Lilac Infracon P. Ltd. from ICICI Bank Ltd.

6. It is not emanating from the accounts furnished by the assessee that the interest expenditure claimed in P&L account includes interest paid to ICICI Bank Ltd. I find merit in the submissions of the assessee, hence, disallowance of interest expenditure Rs.3,11,520/- is deleted.

7. In the result, impugned order is set aside and appeal of the assessee is allowed.

Order pronounced in the open court on Friday the 06th day June, 2025.