ORDER
1. The present appeal has been filed by the assessee against the order passed by the National Faceless Appeal Centre (NFAC), under Section 250 of the Income Tax Act, 1961, (hereinafter referred to as “Act”).
2. The grounds raised by the assessee read as under:-
| 1. | | The ld. CIT(A) disallowances of interest expenses of Rs.6,71,628/- (out of total interest expenses claimed of Rs.11,82,661) considering not for business purposes. |
| 2. | | The ld. CIT(A) even the cash credit interest paid on business stock hypothecation bank loan has been disallowed. |
| 3. | | Any other matter with prior permission of the chair. |
3. At the outset itself, it was pointed out that there was a solitary issue involved in the present appeal pertaining to disallowance of interest claimed by the assessee as business expenditure under Section 36(1)(iii) of the Act. The quantum of disallowance of interest amounts to Rs.6,71,628/- and the disallowance was made finding the said expenditure to have not been established by the assessee, to have been incurred wholly and exclusively, for the purpose of business of the assessee.
4. The contention of the learned counsel for the assessee before us was that the assessee had established the fact of the expenditure having been incurred, for the purpose of the business of the assessee by pointing out that the interest expenditure had been incurred on loan taken for acquiring a capital asset, being a commercial property for use in the business of assessee. Alternatively, he argued that, if the commercial asset acquired by the assessee, which fact is not in dispute by the department, is not accepted as used for the purpose of business of the assessee, then the assessee is entitled to claim the interest expenditure as allowable deduction under Section 24(b) of the Act, under the head “Income from the House Property”.
5. Learned DR per contra, vehemently, opposed the contention of the learned counsel for the assessee as above. His contention was that the assessee had failed to establish the user of the capital asset acquired by it, i.e. the commercial property, in the business of the assessee, therefore, the assessee had no case for claiming any deduction of the interest expenses, as being incurred for the purpose of business of the assessee and the claim, therefore, was rightly disallowed by the AO/ld. CIT(A). With regards to the alternate contention of the assessee of the interest expenditure being allowable as deduction under Section 24(b) of the Act, he relied on the findings of the ld. CIT(A) to the effect, that the assessee had not earned any income from the said property, nor, had demonstrated the property to be let out and, therefore, the assessee’s claim of deduction of interest under Section 24(b) of the Act was not tenable.
6. We have heard the rival contentions. The issue for our consideration is the allowance of claim of interest expenses amounting to Rs.6,71,628/-, which the assessee had claimed as business expenses and alternatively, as expenses allowable under the head “Income from House Property”, under Section 24(b) of the Act.
7. The facts relating to the issue which are not in dispute, and which emanate from the orders of the authorities below, are that the assessee is an individual and is carrying on business in his proprietorship firm “SHE”. During the impugned year, the assessee had claimed deduction on account of interest amounting to Rs.11,82,662/- from his business income. However, the AO disallowed interest expenses to the tune of Rs.6,71,628/-, holding that such interest was not incurred for business purposes but for acquiring a capital asset (property at Miraz Mall, Ajmer). The case of the AO is that the impugned property was not demonstrated to have been used for business purposes and therefore, the assessee was not entitled to claim deduction of interest on account of loans utilized for acquiring such property.
8. We have noted, that the ld. CIT(A) at para 8.3 of his order has recorded a finding of fact that borrowed funds were utilized by the assessee for acquiring a commercial property situated at Miraz Mall, Ajmer, and prior to the asset being put to business use, the interest paid on the capital borrowed for acquisition of a capital asset does not qualify for deduction under Section 36(1)(iii) of the Act. The learned counsel for the assessee does not dispute the position of law as stated by the ld. CIT(A) that prior to the capital asset being put to use, interest paid on capital borrowed for acquiring the asset is not allowable in terms of Section 36(1)(iii) of the Act. His contention was that the asset was put to use for business purposes. However, the learned counsel for the assessee was unable to establish in any manner the factum of user of the impugned asset for business purposes, during the impugned year. He was unable to demonstrate the establishment of the fact of user of the asset for business purposes before the lower authorities and was unable to do so before us also. During the course of hearing, he referred to an UDYAM Registration Certificate issued by the Government of India, Ministry of Micro, Small and Medium Enterprises, to the assessee pointing out that as per the said Certificate the impugned property was put to use in the business of the assessee. The said document was placed in paper book at page No.1 to 4A. However, it was pointed out at Bar to the learned counsel for the assessee that the impugned Certificate reflected the date of UDYAM Registration as 27.04.2021, which is subsequent to the impugned assessment year before us that is Assessment Year 2019-20. It was therefore, pointed out that the said UDYAM Registration Certificate did not establish the fact of the commercial property acquired by the assessee being put to use in the business of the assessee during the impugned year. Learned counsel for the assessee, thereafter, conceded that he had no case on this aspect of the issue and that he was unable to dislodge the findings of the ld. CIT(A) that the assessee was unable to prove the user of the capital asset acquired from loans in the business of the assessee.
9. In the light of the above concession made by the learned counsel for the assessee in the open Court, it stands as a matter of fact, that the asset acquired by the assessee during the year being commercial property was not demonstrated and established to have been either acquired and/or used for the purposes of business of the assessee. In view of the same, we find no infirmity in the order of the ld. CIT(A) upholding the disallowance of deduction u/s 36(1)(iii) of the Act amounting to Rs.6,71,628/-.
10. Taking up the alternate plea of the assessee that the interest expenditure is allowable under Section 24(b) of the Act, we have gone through the provisions of law in this regard. Section 24(b) reads as under:-
Deductions from income from house property.
24.” Income chargeable under the head “Income from house property” shall be computed after making the following deductions namely:
(a) ………………………………………
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Provided that in respect of property referred to in sub-section (2) of Section 23, the amount of deduction (or, as the case may be, the aggregate of the amount of deduction) shall not exceed thirty thousand rupees:
Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed (within (five) years from the end of the financial year in which capital was borrowed), the amount of deduction (or, as the case may be, the aggregate of the amounts of deduction) under this clause shall not exceed (two lakhs rupees)…”
As per the said section income chargeable under the head “Income from House Property” is to be computed after allowing deductions specified in the said section and sub-clause (b) allows the deduction on account of interest expenditure incurred for acquiring such property. Income chargeable to tax under the head “Income from House Property” has been dealt with in Section 22 of the Act which reads as under:-
Income from house property.
22. “The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “Income from House Property”.
As per the said section the annual value of any property consisting the buildings or land appurtenant thereto of which the assessee is the owner, other than portions of such property which he may occupy for the purpose of any business are chargeable to tax under the head “Income of House Property”. In the impugned year, it is a fact on record, that the commercial property acquired by the assessee was not occupied for business purposes. The annual value of such property therefore, qualified for taxation under the head “Income from House Property”. Determination of annual value is prescribed u/s 23 of the Act. In terms of Section 24(b) of the Act the assessee is entitled to claim deduction of interest paid for acquiring such property from the annual value. Therefore, we find merit in the contention of the assessee that the assessee is entitled to claim deduction of interest paid for acquiring the impugned property in terms of Section 24(b) of the Act. However, at the same time, since this deduction of interest is to be allowed from the annual value of the property, the issue is restored back to the file of the AO, to allow the claim of the assessee of deduction of interest under Section 24(b) of the Act, after computing the annual value of the property as prescribed by law. AO is directed to give due opportunity of hearing to the assessee while computing the said income.
The appeal of the assessee is therefore, allowed in above terms for statistical purposes.