Case Law Details
M/s. Shah Construction Co. Vs ITO (ITAT Mumbai)
Conclusion –
Deduction of interest u/s 24B allowable when loan borrowed to repay previous loan taken for the construction of residential unit.
Facts –
Assessee has constructed a building namely Sumer Heights comprising two blocks A & B. Block-A comprised of residential units and Block-B was a commercial building.
The assessee let out Block B to Axis Bank Ltd. on a monthly rental of Rs.15 lakhs and also borrowed a sum of Rs.8,45,00,000/- which was utilised by the assessee to repay the loan creditors which were standing in the balance sheet
Assessee showed loss of INR 2,33,636 from house property which was arrived at after claiming interest of INR 1,08,73,636 u/s 24 (INR 1,02,37,297 paid to Axis Bank and INR 636700 paid to Ramesh Trust). According to AO there is no nexus between borrowing and repayment of the previous loan and therefore no deduction is admissible under section 24B of the Act
Assessee submitted that loan was taken from Axis Bank to repay the existing creditors from whom the money was borrowed for the construction of property.
Held –
Loan from the Axis Bank was used to pay the money to the partners and to the lenders. There was a nexus between borrowing and repayment of earlier loan creditors. Interest needs to be apportioned between two buildings i.e. Block-A and B in the ratio of investment. Accordingly, proportionate deduction allowed u/s 24B
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal has been preferred by the assessee against the order dated 07.11.2014 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2011-12.
2. In the various grounds of appeal, the assessee has raised two issues. The main issue raised by the assessee is against the upholding the disallowance of interest of Rs.1,02,37,297/-paid to Axis Bank Ltd by Ld. CIT(A) as made by the AO on the ground that the assessee could not establish the nexus between the borrowing funds from Axis Bank and repayments to the previous lenders whereas another ground without prejudice raised by the assessee is to direct the AO to allow the deduction of interest as business expenditure to be set off against the business income of the assessee.
3. The facts in brief are that the assessee is a partnership carrying on the business of real estate developer during the year the assessee has shown a loss of Rs.2,33,636/- from house property which was arrived at after claiming interest of Rs.1,08,73,636/- under section 24 of the Act comprising Rs.1,02,37,297/- paid to Axis Bank Ltd. and Rs.6,36,700/-paid to Ramesh S. Shah Family Trust. The assessee has developed property known as Sumer Chambers along with M/s. R.K. Builders and project was completed in A.Y. 2005-06. After completion of the project, the assessee received its share in A-wing which is residential area and B-wing which is a commercial area and same were shown as closing stock in the balance sheet of the assessee. Thereafter, assessee sold part of the total area shown in closing stock during A.Y. 2005-06 and 2007-08 and income was offered for taxation under the head “Income from business and profession”. The unsold area was converted from stock in trade to investment and was shown as under:
Investment in Sumer Heights – Building “A” Rs.2,78,76,708/-
Investment in Sumer Heights – Building “B” Rs.6,80,07,882/-
Rs.9,58,84,590/-
| The loan pertaining to the said property also appeared in the balance sheet as under: | |
| 1. Ramesh S. Shah Family Trust | Rs. 69,09,673 |
| 2. Manakchand H. Loonkar | Rs.5,15,05,674 |
| 3. Sumerchand H. Shah HUF | Rs. 71,77,123 |
| Rs.6,55,92,470 | |
Thereafter, assessee let out the commercial bank for a monthly rent of Rs.15 lakhs to Axis Bank Ltd. and also borrowed a loan of Rs.8,45,00,000/- from the Axis Bank Ltd. and thus claimed the interest paid to Axis Bank Ltd. and Ramesh S. Shah Family Trust as allowable deduction under section 24 of the Act. According to the AO, assessee has already acquired the property before borrowing money from the Axis Bank Ltd. and therefore asked the assessee to explain as to why the interest is admissible under section 24B of the Act. The assessee submitted that the loan was taken from Axis Bank Ltd. to repay the existing creditors from whom the money was borrowed for the construction of property as under:
| Date | Particulars | Amount Paid | ||
| 09/10/2009 | Loan taken | 8,45,00,000 | ||
| 15/10/2009 | 1 | Manju B. Shah | 75,00,000 | 75,00,000 |
| 15/10/2009 | 2 | Mahendra Loonkar |
1,50,00,000 | 1,50,00,000 |
| 26/11/2009 | 1,00,00,000 | |||
| 29/12/2009 | 5,00,000 | 2,55,00,000 | ||
| 12/11/2009 | 3 | Ramesh S. Shah HUF | 73,00,000 | |
| 26/11/2009 | 1,00,00,000 | |||
| 29/11/2009 | 50,00,000 | 2,23,00,000 | ||
| 26/11/2009 | 4 | Palash B. Shah | 1,00,00,000 | |
| 29/12/2009 | 25,00,000 | 1,25,00,000 | ||
| 20/10/2009 | 5 | Ruchira R. Shah | 1,67,00,000 | 1,67,00,000 |
| 8,45,00,000 | ||||
4. The AO observed that assessee has converted unsold stock into investment in Financial Year 2007-08 and also observed that loans appearing as outstanding as on 31.03.2008 were as under:
Ramesh S. Shah Family Trust Rs. 69,09,673
Manakchand H. Loonkar HUF Rs.5,15,05,674
Sumerchand H. Shah HUF Rs. 71,77,123
Rs.6,55,92,470
5. However, the loan taken from Axis Bank Ltd. was utilised to repay the five creditors as stated hereinabove therefore according to the AO there is no nexus between borrowing and repayment of the previous loan and therefore no deduction is admissible under section 24B of the Act and the CBDT circular No.28 dated 20.08.1969 (F.No.8/8/69-IT (A-I) as the said circular provides that only loan borrowed to repay the previous loan taken for the construction of the property has to be considered at the time of allowing deduction under section 24B of the Act. However, AO further observed that the investments as appearing in the balance sheet as on 31.03.2009 was Rs.12,47,74,629/- as per details as under:
Investment in Sumer Heights – Building “A” Rs. 4,21,16,550
Investment in Sumer Heights – Building “B” Rs. 8,26,58,079
Rs.12,47,74,629
According to the AO if the loan of Rs.8,26,58,079/- is taken for the purpose of construction of building A and B then the same can not be attributed to the construction of building B only and has to be divided between the two properties according to the percentage of investments which the AO worked out as under:
| Name of the building | Cost | 9% of investment | Total Interest paid | Proportionate interest allowable |
| Building
“A” |
4,21,16,550 | 34% | 36,97,159 | |
| Building
“B” |
8,26,58,079 | 66% | 71,76,838 | |
| Total | 12,47,74,629 | 100% | 1,08,73,997 | 1,08,73,997 |
Finally, the AO disallowed the entire interest of Rs.1,02,37,297/- whereas the interest paid to Ramesh S. Shah Family Trust Rs.6,36,700/- was allowed.
6. In the appellate proceedings, the Ld. CIT(A) dismissed the appeal of the assessee by observing that assessee could not establish the nexus between the money borrowed from Axis Bank Ltd. is in fact utilised to repay the loans which were taken for the purpose of construction of the properties. Hence, the assessee is in appeal before us.
7. The Ld. A.R. vehemently submitted before us that the order of Ld. CIT(A) confirming the disallowance as made by the AO as totally wrong and against the facts of the case. The Ld. A.R. submitted that the assessee converted the unsold stock of Block-A and Block-B of Sumer Buildings which he received after confirmation and also after reducing the already disposed of stock in A.Y. 2005-06 and 2007-08 in F.Y. 2005-06 and 2007-08 which was duly offered to tax converted the remaining into investments which was duly shown as investment in the balance sheet as on 31.03.2008 and the corresponding loans were also shown as outstanding. Thereafter, as on 31.03.2009 the value of investments was shown at Rs.12,47,74,629/- comprising Sumer Height Building-A Rs.4,21,16,550/- and Sumer Height Building-B Rs.8,26,58,079/-. The Ld. A.R. submitted that the assessee let out the commercial wing-B to Axis Bank Ltd. on a monthly rental of Rs.15 lakhs and also made borrowings to the tune of Rs.8,45,00,000/-. Since the disbursement of funds from Axis Bank Ltd. took merely 6 months therefore during the intervening period the partners of the firm contributed funds to repay the loan to Manakchand H. Loonkar of Rs.5,15,05,674/- and thus the disbursement was used to repay the money raised for the construction of the Sumer Heights Building and established the direct nexus between the construction of property which is let out and the borrowing which is made from the Axis Bank Ltd. The Ld. A.R. drew our attention to para No.4 of assessment order wherein the AO has recorded a finding of fact that the interest of Rs.1,08,73,997/- has to be apportioned in the ratio of investments in the building-A and B which he bifurcated into two buildings as building-A Rs.36,97,159/- and building-B Rs.71,76,838/-. The Ld. A.R. vehemently submitted that the AO has misrecognized the fact that Rs.71,76,838/- pertained to the building-B whereas Rs.36,97,159/- pertained to building-A. Finally, the Ld. A.R. prayed before the Bench that in view of the said finding the interest of Rs.1,02,37,297/-should be allowed under section 24B as claimed by the assessee. The Ld. A.R. has also taken without prejudice submission and argument that if at all the first prayer of the assessee is not accepted by the Tribunal Rs.71,76,838/-should be allowed under section 24B of the Act and Rs. 36,97,159/- may be allowed as business expenditure to be off set against the business income of the assessee.
8. The Ld. D.R., on the other hand, relied on the orders of authorities below and submitted that since the assessee is completely failed in establishing a nexus between the borrowed funds from the Axis Bank Ltd. and the repayment to the existing lenders and therefore the AO has rightly disallowed the entire interest as claimed by the assessee under section 24B of the Act. The Ld. D.R. also rebutted the reliance of assessee on circular No.28 dated 20.08.1969 by submitting that the said circular is not applicable in the present circumstances as the no nexus of the subsequent loan borrowed by the assessee to repay the earlier loan was established and thus the Ld. CIT(A) has passed a very reasoned and detailed order after taking into account the every aspect of the matter and therefore the same deserved to be affirmed.
9. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has constructed a building namely Sumer Heights comprising two blocks A & B wherein block-A comprised of residential units and block-B was a commercial building. After completion of the building whatever share came to the assessee was shown as stock in trade in the balance sheet and also the corresponding loans were accounted for which were taken for the purpose of construction of the building. The assessee has sold certain part of the closing stock in F.Y. 2005-06 and 2007-08 and duly offered the same to tax as it was income from business in the F.Y. 2007-08. The assessee converted the unsold stock as investments as on 31.03.2008 which are as under:
Investment in Sumer Heights – Building “A” Rs.2,78,76,708/-
Investment in Sumer Heights – Building “B” Rs.6,80,07,882/-
Rs.9,58,84,590/-
| The corresponding loan was also shown in the balance sheet as under: | |
| 1. Ramesh S. Shah Family Trust | Rs. 69,09,673 |
| 2. Manakchand H. Loonkar | Rs.5,15,05,674 |
| 3. Sumerchand H. Shah HUF | Rs. 71,77,123 |
| Rs.6,55,92,470 | |
The assessee let out the commercial wing i.e. property B to Axis Bank Ltd. on a monthly rental of Rs.15 lkahs and also borrowed a sum of Rs.8,45,00,000/- which was utilised by the assessee to repay the loan creditors which were standing in the balance sheet as under:
| Date | Particulars | Amount Paid | ||
| 09/10/2009 | Loan taken | 8,45,00,000 | ||
| 15/10/2009 | 1 | Manju B. Shah | 75,00,000/ 75,00,000 | |
| 15/10/2009 | 2 | Mahendra Loonkar | 1,50,00,000 | 1,50,00,000 |
| 26/11/2009 | 1,00,00,000 | |||
| 29/12/2009 | 5,00,000 | 2,55,00,000 | ||
| 12/11/2009 | 3 | Ramesh S. Shah HUF | 73,00,000 | |
| 26/11/2009 | 1,00,00,000 | |||
| 29/11/2009 | 50,00,000 | 2,23,00,000 | ||
| 26/11/2009 | 4 | Palash B. Shah | 1,00,00,000 | |
| 29/12/2009 | 25,00,000 | 1,25,00,000 | ||
| 20/10/2009 | 5 | Ruchira R. Shah | 1,67,00,000 | 1,67,00,000 |
| 8,45,00,000 |
The contention of the AO was that since the loan repaid as above were not taken for the purpose of the construction and therefore the deduction of interest paid to Axis Bank Ltd. Rs.1,02,37,297/- was not allowable under section 24B of the Act. Whereas, on the other hand, the assessee has claimed that the money taken from 5 parties aggregating to Rs.8.5 crore were borrowed from 5 creditors as detailed hereinabove were used to pay the earlier lenders and therefore there is a direct nexus and the same is admissible under section 24B of the Act. We, further, find that there is a nexus between the borrowing and repayment of earlier loan creditors. The fact is also adequately substantiated by the observation of the AO in the assessment order wherein the AO has apportioned the interest between property A and property B as under:
| Name of the building | Cost | 9% of
investment |
Total
Interest paid |
Proportionate interest allowable |
| Building
“A” |
4,21,16,550 | 34% | 36,97,159 | |
| Building
“B” |
8,26,58,079 | 66% | 71,76,838 | |
| Total | 12,47,74,629 | 100% | 1,08,73,997 | 1,08,73,997 |
10. Therefore, in view of the said facts and circumstances, we are not in agreement with the finding of the Ld. CIT(A) that there is no direct nexus between the borrowings and repayment to the earlier lenders. The AO has himself observed that the interest of Rs.1,08,73,997/- which is made up of two amounts Rs.1,02,37,297/- as interest to Axis Bank Ltd. and Rs.6,36,700/- paid to Ramesh S. Shah Family Trust. We, further, note that the AO got confused and misunderstood the sequence of transaction and their chronology. The assessee first constructed the building with borrowed money thereafter to pay the major creditor Manakchand H. Loonkar HUF retired partner of Rs.5,15,05,674/-. The five partners of the firm contributed Rs.5,20,00,000/- and thereafter the loan from the Axis Bank Ltd. was used to pay the money to the partners and to the lenders. Under these circumstances, we are of the view that the observation of the AO that interest of Rs.1,08,73,997/- has to be apportioned between two buildings i.e. building A and B in the ratio of investment according to which the interest attributable to building A comes to Rs.36,97,159/- and building B Rs.71,76,838/-. Thus, we direct the AO to allow the interest of Rs.1,02,37,297/- in the proportion of 34% to building A and 36% to building B. Resultantly, Rs.67,56,616/- is admissible under section 24B and Rs.34,80,681/- is to be treated as business interest be set off against the business income of the assessee. The AO is accordingly directed.
11. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 24.08.2018.
