The Assessee acquired a property for the purpose of business against a loan taken. However, the Assessee failed to use such property for the purpose of business and eventually let out the property on rent to HDFC Bank against rental income. During the impugned Assessment Year, a fresh loan was taken for repayment of the first loan. The interest cost incurred on such borrowing was claimed as a deduction under section 24 and alternatively under section 36(1)(iii) of the Act. The Assessing Officer disallowed the deduction against rental income on account of lack of evidence substantiating utilisation of the loans towards the acquisition of the property and against business income since the Assessee had closed down its business.

The Hon’ble Tribunal post analysing the financials of the Assessee observed that the amount borrowed under the second loan after settlement of the outstanding first loan was not utilised for the purpose of acquiring the property. Accordingly, the interest expense incurred in proportion to the borrowing utilised for repayment of first loan was held to be eligible for deduction against rental income. Further, considering the fact that no business was carried on by the Assessee during the relevant year and in immediate previous year, it was held that the balance amount of borrowing cannot be considered for the purpose of business and allowed u/s 36(1)(iii) of the Act. (AY. 2014-15)