The Kerala High Court ruled that the land in question was being used for agricultural purposes, thereby generating agricultural income exempt from income tax under section 10(1) of the Income Tax Act.
The petitioner, engaged in asset management services, reported a total income of Rs. 1,08,22,440/- for the Assessment Year (AY) 2012–13. However, during scrutiny under section 143(2) of the Income Tax Act, the assessment found the total income to be Rs. 2,02,75,110.
The assessing officer disallowed an interest amount of Rs. 90,73,279 claimed by the petitioner on long-term borrowings. This disallowance was based on the premise that the loan amount had been used to purchase agricultural land worth Rs. 5,91,52,500/-, where tapioca was cultivated, leading to agricultural income.
Upon appeal, the Commissioner of Income Tax (Appeals) found that the petitioner had acquired the land for business purposes. However, the appellate authority’s order lacked clear reasoning or evidence to support the finding that the land was solely utilized for business purposes.
Subsequently, the department filed a petition before the Income Tax Appellate Tribunal (ITAT) against the appellate authority’s decision. The ITAT ruled that there was a direct connection between the interest-bearing loans taken by the taxpayer and the investment in agricultural land. As income from such land is exempted under section 10(1) of the Act, the interest deduction under section 36(1)(iii) was disallowed.
The court upheld the ITAT’s decision, noting that expenses incurred under section 14A of the IT Act cannot be considered as business expenses under section 36(iii) of the Income Tax Act. Thus, the interest claimed by the petitioner on the loan used to purchase agricultural land for generating exempt agricultural income was rightly disallowed.
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