No Disallowance u/s 36(1)(iii) of Income Tax Act towards interest paid to IDFC Bank for loan taken to Construct Hostel for Students: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Bangalore bench held that disallowance under Section 36(1)(iii) Income Tax Act, 1961 should not be made towards interest paid to the IDFC for loans taken to construct hostels for students.

Assessee, Manipal Education is engaged in the business of providing engineering asset management and maintenance service. After filing the return of income, the assessee case was selected for scrutiny.

During the assessment proceedings AO noted that Assessee had taken a loan from IDFC Bank and he disallowed  the  interest amount paid to the bank. Moreover assessee claimed a sum as revenue expenditure that will be also disallowed by the AO because AO argue that  the sum is used for construction of  of hostels for students, and a fixed asset, i.e., land has been purchased from a loan.

Aggrieved against the order, the assessee filed an appeal before the CIT(A), who dismissed the appeal. Thereafter the assessee filed appeal before the tribunal.

During the proceedings before the bench S.K. Tulsiyan,counsel for assessee submitted that  assessee have sufficient interest free funds to purchase the said Land. Thus  investment in the land amounting to Rs.45.04 Crores has been made out of non-interest bearing funds, available with the Assessee.

Therefore, the Assessee has not utilized any borrowed funds towards the acquisition of the fixed asset.

Further the loan from IDFC was for hostel construction and has been utilized only for that purpose and not for the purchase of land and the interest on such loan has been capitalized by the assessee.

Dr. Satyasai Rath, Counsel for the revenue supported the decision of the lower authorities.

It was observed by the tribunal that the  interest bearing funds were not being utilized for the purchase of land and the assessee had sufficient interest free funds. Thus assessee has not utilized the borrowed fund for the purchase of land.

After considering  the facts submitted by both parties, the two member bench of Laxmi Prasad Sahu (Accountant Member) and  George George K (Vice President) held that land purchase by the assessee is out of non-interest bearing funds. Therefore the Disallowance of interest of Rs.4.85 crores under Section  36(1)(iii) of the Income Tax Act is not warranted, the tribunal added.

To Read the full text of the Order CLICK HERE

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