Facts of the Case

The assessee, an individual carrying on business through his proprietorship concern “M/s SHE”, filed his return of income for Assessment Year 2019-20 claiming interest expenditure of ₹11,82,661 as business deduction. Out of the said amount, the Assessing Officer disallowed interest of ₹6,71,628 on the ground that the borrowed funds were utilised for acquiring a commercial property situated at Miraz Mall, Ajmer, which was not proved to have been put to use for business purposes during the relevant year. The disallowance was upheld by the CIT(A), NFAC. Aggrieved, the assessee filed an appeal before the Tribunal.

Issues Involved

Whether interest on borrowed capital utilised for acquisition of a commercial property is allowable as business expenditure under Section 36(1)(iii) when the asset is not put to use, whether such interest can alternatively be allowed under Section 24(b) while computing income from house property, and whether the matter requires restoration for computation of annual value.

Petitioner’s Arguments

The assessee contended that the interest expenditure was incurred for acquisition of a commercial property intended for business use and therefore allowable under Section 36(1)(iii). Alternatively, it was argued that even if the property was not accepted as used for business, the interest expenditure should be allowed as deduction under Section 24(b) while computing income from house property. Reliance was placed on the statutory scheme permitting deduction of interest on borrowed capital used for acquiring property.

Respondent’s Arguments

The Revenue contended that the assessee failed to establish actual use of the commercial property for business purposes during the relevant year and therefore interest could not be allowed under Section 36(1)(iii). It was further argued that since no income from the property was shown and the assessee failed to demonstrate letting out or business use, deduction under Section 24(b) was also not allowable.

Court Order / Findings

The ITAT Jaipur held that interest on borrowed capital for acquisition of a capital asset is allowable under Section 36(1)(iii) only from the date the asset is put to use. The Tribunal noted that the assessee failed to establish that the commercial property was put to use for business during the relevant assessment year and therefore upheld the disallowance of interest under Section 36(1)(iii).

However, the Tribunal accepted the alternate plea of the assessee and held that since the property was not used for business, its annual value was chargeable under the head “Income from House Property” in terms of Section 22. The Tribunal held that interest paid on borrowed capital for acquisition of such property is allowable as deduction under Section 24(b). The matter was restored to the file of the Assessing Officer to compute the annual value of the property and allow deduction of interest under Section 24(b) in accordance with law after granting due opportunity of hearing to the assessee.

Important Clarification

The Tribunal clarified that interest on borrowed capital is allowable as business expenditure only after the asset is put to use. Where the asset is not used for business, the property falls under the head “Income from House Property” and interest deduction is allowable under Section 24(b) while computing annual value, subject to statutory limits and computation provisions.

Final Outcome

The appeal filed by the assessee was partly allowed for statistical purposes. The disallowance of interest under Section 36(1)(iii) was upheld, but the Assessing Officer was directed to allow deduction of interest under Section 24(b) after computing the annual value of the property in accordance with law and after providing reasonable opportunity of being heard to the assessee.

Link to download order- https://www.mytaxexpert.co.in/uploads/1768993107_RUPKUMARRAMCHANDANIAJMERVS.INCOMETAXOFFICERWD12AJMERAJMER.pdf

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