Disallowance of Interest on Property Purchase Justified Where OD Account Used — ITAT Partly Allows Appeal

Sarbinder Singh Bindra vs. Asst. CIT, ITA No.7591/Del/2019

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in the case of Sarbinder Singh Bindra vs. ACIT (ITA No. 7591/Del/2019) for A.Y. 2016–17 that disallowance of interest on funds used for purchasing an immovable property was justified where the investment was clearly made from an overdraft (OD) account.

However, considering the assessee’s alternate computation, the ITAT reduced the disallowance from ₹99.19 lakhs to ₹46.28 lakhs, offering partial relief.

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Background

• The assessee, an individual and proprietor of M/s TSB Overseas, filed his return declaring income of ₹1.53 crore.

• The case was selected for limited scrutiny under CASS for:

  1. Foreign remittance compliance,

  2. Turnover accuracy, and

  3. Disclosure of property-related investment and income.

• During the assessment, the AO observed a substantial rise in borrowings and concluded that interest-bearing funds were used to acquire a property worth ₹10.28 crore.

The AO disallowed ₹1.13 crore of interest, which was later revised to ₹99.19 lakh via rectification. The assessee challenged the action before the CIT(A), and then to the ITAT.

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Key Issue

Whether the AO had jurisdiction under limited scrutiny to disallow interest on borrowed funds used for acquiring an immovable property?

Whether the disallowance of interest of ₹99.19 lakh was factually justified or excessive?

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Assessee’s Arguments

• Jurisdiction Challenge:
  The AO acted beyond the scope of limited scrutiny as per CBDT Instructions No. 5/2016 and No. 20/2015 by disallowing interest that wasn’t specifically flagged.

• Availability of Own Funds:
  The assessee claimed that he had own capital and depreciation totaling over ₹15 crore, more than sufficient to fund the ₹10.28 crore investment.

• OD Account as Business Account:
  The payments were made from a common OD account used for business transactions, and no direct nexus was established between borrowed funds and the property purchase.

• Alternative Computation:
  If any disallowance were to be made, it should be restricted to ₹46.28 lakh based on a detailed working filed during appellate proceedings.

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Department’s Counter

• The OD account had a negative balance throughout the period of the property acquisition, proving that borrowed funds were clearly used.

• Without the property investment, the account would have a positive balance, indicating that interest-bearing funds funded the acquisition.

• The property was not used for business purposes and shown as a personal asset, thus interest on borrowed capital was not allowable under Section 36(1)(iii).

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ITAT’s Ruling

On Jurisdiction:

• Issue within limited scrutiny: One of the CASS flags was whether investment and income relating to property were duly disclosed.

• The AO’s examination of funds used for purchasing the property fell within this scrutiny scope, and hence, CBDT Instructions were not violated.

On Interest Disallowance:

• The OD account balance increased by ₹6 crore during the acquisition period — proving direct nexus with the property.

• Courts have held (e.g., Reliance Utilities, South Indian Bank) that presumption of use of own funds applies only in mixed fund scenarios without clear nexus.

• Here, the nexus was established, so the interest disallowance was legally sustainable.

On Quantum of Disallowance:

• The Tribunal accepted the assessee’s alternate computation and restricted the disallowance to ₹46,28,801 instead of ₹99,19,025.

• This approach balanced factual correctness with legal precedent.

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Key Precedents Cited

• CIT v. Reliance Utilities and Power Ltd. (313 ITR 340) – Mixed fund presumption.

• South India Bank Ltd. v. CIT (438 ITR 1, SC) – Where own funds > investment, presumption favors assessee.

• East India Pharmaceutical Works Ltd. v. CIT – No disallowance if sufficient own funds exist.

• CBDT Instructions No. 5/2016 & 20/2015 – Guidelines on limited scrutiny and jurisdiction.

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Final Outcome

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Takeaways

• OD account usage matters: If property investments increase OD liabilities, interest on such borrowings is not deductible unless used for business.

• Presumption of own fund usage is rebuttable: Clear transactional evidence can override the principle laid down in mixed-fund cases.

• Scrutiny scope must be respected: But if the issue of investment in property is flagged, interest on such investment can be examined.

• Alternative plea strategy helps: Submitting a fallback working on quantum can secure partial relief even when primary arguments fail.

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