ITAT Upholds ₹2.93 Cr Interest and ₹4.01 Cr Management Expenses Deduction Citing Business Purpose u/s 36(1)(iii) and 37(1) [Read Order]

M/s PGF Ltd., (assessee) engaged in diverse businesses such as real estate, commercial land, timber, and spices, faced scrutiny from the Assessing Officer (AO) for the assessment years 2004-05 to 2006-07.

The AO disallowed several claims, including Rs. 2.93 crore in interest expenses, Rs. 4.01 crore in indirect management expenses, and Rs. 2.52 crore in land development expenditure, among others, citing inadequate justification or allocation to joint venture accounts.

Aggrieved by the AO’s orders, the assessee appealed to the CIT(A). The CIT(A) reversed the AO’s disallowances, relying on the Supreme Court’s ruling in S.A. Builders for interest deductions and the Delhi High Court’s decision in Dalmia Cement for management expenses.

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The CIT(A) held that the interest of Rs. 2.93 crore was directly attributable to business activities and allowable under Section 36(1)(iii), while the management expenses of Rs. 4.01 crore were incurred wholly and exclusively for business purposes under Section 37(1) of the Income Tax Act.

Aggrieved by the CIT(A)’s order, the Revenue filed an appeal before the ITAT. The Revenue argued that the AO’s disallowances were justified, particularly the allocation of interest to joint venture accounts and the disallowance of management and land development expenses due to insufficient evidence.

The counsel assessee submitted that the funds were borrowed for business purposes, the interest was calculated proportionately, and the expenses were supported by agreements and services, as in the case of land development work by M/s A.I. Estates.

The two-member bench comprising Satbeer SinghGodara (Judicial Member) and Naveen Chandra (Accountant Member), observed that for interest deduction of Rs. 2.93 crore the assessee had borrowed funds from investors at an average rate of 14.1% and proportionately calculated the interest attributable to business activities.

The tribunal upheld the CIT(A)’s finding that the interest was expended for business purposes and was allowable under Section 36(1)(iii) of the Income Tax Act.

The tribunal observed that regarding the Rs. 4.01 crore management expenses, the AO had disallowed indirect expenses based on sales allocation, despite the joint venture activity being non-operational during the year.

The Tribunal bench observed that the assessee had incurred Rs. 28.59 crore in management and other expenses, and the CIT(A) had correctly verified that the disallowed Rs.4.01 crore was genuine and related to new business activities. It upheld the deduction under section 37(1) of the Income Tax Act.

The tribunal concluded that the CIT(A) had correctly applied the law and judicial precedents, and the AO’s disallowances were either inadequately justified or lacked evidence. The appeals of the Revenue were dismissed.

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