ITAT Delhi Deletes Interest Disallowance Where Property Investments Were Not Funded From Business Credit
Background of the Dispute
In the case of Pankaj Shukla Vs ITO (ITAT Delhi), the assessee approached the Income Tax Appellate Tribunal, Delhi Bench, challenging an order passed by the Commissioner of Income Tax (Appeal)-2, Gurgaon dated 30.10.2019 for Assessment Year 2016-17. The assessment had been framed under section 143(3) of the Income Tax Act 1961.
The appeal revolved around a single contentious issue: whether the Assessing Officer (AO) and the CIT(A) were justified in disallowing interest expenditure of Rs.3,11,520/-, which the assessee had claimed as a business expense in the Profit & Loss account.
Business Profile and Nature of Borrowings
The assessee was engaged in the business of manufacturing, trading and export of woolen carpets. For running this business, the assessee had availed credit facilities from Bank of Baroda, on which interest was routinely paid and debited to the Profit & Loss account as bank interest and charges.
During the relevant previous year, the assessee had also made certain property-related investments, namely:
- Payment towards purchase of a flat from Lilac Infracon P. Ltd.
- Advance payment for booking a flat with Panorama, Mumbai
The key question before the Tribunal was whether any part of the bank interest claimed as a business deduction actually related to these property investments, or whether it was wholly connected to working capital and other business facilities.
Property Investments and Funding Structure
Investment in Lilac Infracon P. Ltd.
The assessee had acquired a residential flat from Lilac Infracon P. Ltd. The funding for this acquisition was explained in detail before the Tribunal. The assessee had arranged the funds as under:
Housing loan from ICICI Bank:
- Home Loan amount: Rs.1,14,51,369.40
- Out of this, Rs.83,65,852.00 was directly paid to Lilac Infracon P. Ltd. from the ICICI home loan account.
Interest on Home Loan:
- ICICI Bank charged interest of Rs.85,517.40 on this home loan.
- This interest amount was debited to the party account of Lilac Infracon P. Ltd., and not to the general Interest Account that was claimed as business expenditure in the Profit & Loss account.
Own funds contribution:
- An additional payment of Rs.30,00,000.00 was made from the assessee’s own funds routed through Bank of Baroda.
The assessee categorically asserted that no portion of the ICICI home loan interest on this housing loan was routed through, or claimed in, the Profit & Loss account as “bank interest” relating to business operations.
Booking Advance for Flat at Panorama, Mumbai
The assessee had also paid a booking advance for a flat with Panorama, Mumbai. The amount paid was Rs.27,36,000.00.
- This payment too was claimed to have been made entirely out of own funds from Bank of Baroda, without utilizing any business credit limits.
- Consequently, no interest attributable to Panorama, Mumbai was stated to have been debited to the Profit & Loss account.
Stand of the Assessing Officer
Despite the above explanations, the AO concluded that the assessee had diverted borrowed funds for non-business purposes, namely, for investment in flats at Lilac Infracon P. Ltd.