The Bengaluru ITAT, on Wednesday, confirmed the disallowance of interest expenses claimed on advances received under sub-Lease agreement since there was a defect in the title of the assessee on the subject property.
The division bench, while dismissing a second appeal filed by Mr. Chetan Dass, an individual, clarified that the claim is not allowable under section 57 of the Income Tax Act, 1961.
In the instant case, Assessee entered into an agreement of lease with Beeradevara Devasthanagala Sangha. Subsequently, there was a dispute between both the entities over the title of the property, which eventually resulted in litigation.
Assessee had entered into a sub-lease agreement with M/s. Tapovan Builders P. Ltd and M/s. Bangalore Hospital Ltd from whom it received sums of Rs.9,50,000/- and Rs.40 lakhs as advance. On the above said advance, assessee claimed Rs.29.90 lakhs as interest expense u/s.57 of the Income Tax Act.
However, the Assessing Officer rejected the claim on the following grounds. (i) the claim is vague ii) the parties entered into lease agreements despite knowing that the property was in litigation iii) the matter has not reached finality and the liability is not crystalised iv) interest is not actually paid and the liability is a contingent one.
Assessee maintained that it was bound to compensate the sub-lessees for any expenses / losses that would be incurred as a result of defect in the title of the assessee.
After hearing the both sides, the Tribunal observed that the liability is only sought to be credited by way of crediting the interest amount was merely a contingent liability / or rather no liability in the eyes of law.
The bench noted that the initial lease for a period of ten years expired on 19.05.1988 and there was no extension of lease agreement in favour of the assessee. “On account of the above, we are of the opinion that once the assessee did not have any right to remain in possession of lease, there was no occasion for the assessee to enter into a sub-lease agreement initially with Tapovan Builders in the year 1987 and thereafter with Bangalore Hospitals Ltd. Moreover the existence of both the sub-lease agreements was dependent upon the clear and marketable title of the assessee, on the basis of which the assessee can execute the sub-lease agreement in favour of these two sub-lessees. Once the title of the assessee is under cloud, there is no occasion for the assessee to execute the sub-lease agreement in favour of these two entities.”
It therefore, said that the claim of the assessee that the interest was payable on advances are not payable on accrual basis. “Once the assessee was unable to discharge its obligation under the agreement, it is for the assessee to take a call and return the amount received by him immediately when he was unable to pay the amount. Further the credit of interest accrued in favour of these two entitles was relatable to the business of the assessee, as it was not wholly and exclusively connected with the business of the assessee. Our view is further supported by the fact that these two entities have not shown any interest amount towards these advances as receivables in their books of account,” the bench said.
Read the full text of the Order below.
