Facts of the Case

The assessee, Mohitbhai Laxmanbhai Gajjar, filed his return of income for Assessment Year 2020-21 on 31.10.2020 declaring total income of ₹64,76,730. The case was selected for scrutiny under CASS and the assessment was completed under Section 144.

During assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction of interest expense of ₹20,25,351 on a loan taken from Axis Bank. The Assessing Officer observed that the loan was sanctioned for purchase of land and construction of a residential house and therefore restricted the deduction of interest to ₹2,00,000 under Section 24, disallowing the balance amount of ₹18,25,351. The total income was assessed at ₹1,05,30,301.

The assessee’s appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi was dismissed. Aggrieved, the assessee preferred an appeal before the Tribunal.

Issues Involved

Whether interest paid on a housing loan could be allowed as a business deduction when the borrowed funds were not immediately utilised for construction but were temporarily deployed to earn taxable interest income, and whether the disallowance made without examining actual utilisation of funds was justified.

Petitioner’s Arguments

The assessee submitted that a loan of ₹5.10 crore was obtained from Axis Bank on 27.09.2019. Although the loan was sanctioned for housing purposes, there was a delay in purchase of land and construction. During the interim period, the loan amount was transferred to the assessee’s proprietary concern and also to his capital account in a partnership firm, from which interest income was earned and duly offered to tax.

It was contended that since the borrowed funds were utilised for earning taxable interest income, the interest paid on such loan was allowable as a deduction. The assessee argued that the Assessing Officer disallowed the claim merely on the basis of the bank sanction letter without examining the actual utilisation of funds.

Respondent’s Arguments

The Revenue relied upon the orders of the Assessing Officer and the CIT(A), contending that the loan was a housing loan and therefore interest deduction was allowable only under Section 24 of the Act.

Court Order / Findings

The ITAT Ahmedabad observed that the fact of availing the loan from Axis Bank and payment of interest thereon was not in dispute. The Tribunal noted that the Assessing Officer had not examined the actual utilisation of the loan amount. It was observed that if there was delay in construction of the house, the funds could not have remained idle and required examination of their interim utilisation.

On perusal of bank statements and ledger accounts placed on record, the Tribunal found that the loan amount was transferred to the assessee’s proprietary concern and to a partnership firm in which the assessee was a partner. The Tribunal held that if the loan funds were utilised for earning taxable interest income, the interest paid on such loan could be allowable as a deduction.

Accordingly, the Tribunal set aside the issue to the file of the Assessing Officer with directions to verify the actual utilisation of the loan amount and examine the nexus between the borrowed funds and the interest income earned. The assessee was directed to furnish necessary evidence in support of his claim.

Important Clarification

The Tribunal clarified that the allowability of interest depends on the actual utilisation of borrowed funds. Even where a loan is sanctioned for housing purposes, if the funds are temporarily deployed for earning taxable income, interest deduction may be allowable subject to verification of nexus.

Final Outcome

The appeal filed by the assessee was allowed for statistical purposes. The issue relating to allowability of interest of ₹18,25,351 was remanded to the Assessing Officer for fresh verification and adjudication in accordance with law.

 Link to download order https://www.mytaxexpert.co.in/uploads/1769061982_MOHITBHAILAXMANBHAIGAJJARAHMEDABADVS.THEDY.CITCIRCLE111AHMEDABAD.pdf

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