2013 (6) TMI 337 - HC - Income Tax

Court denies interest deduction for lack of evidence linking borrowed funds to business use

M/s. A. Murali & Co. (P) Ltd. Versus The Assistant Commissioner of Income Tax

The Court upheld the Tribunal's decision to disallow the interest payment, emphasizing the lack of nexus between the borrowed funds and advances to ... Interest on borrowed funds - disallowance of claim on the ground that there was additional amount of advances given to directors, without any nexus being established between the borrowed funds and the advances made to Directors - Held that:- Except for stating that the assessee had made borrowal in the immediate preceding accounting year, no materials were placed before this Court or before any other authority to show that the borrowed funds were not diverted for any purpose other than business. The mere contention that the borrowed funds were utilised for the purchase of Masoor Dhall from Sri Saravana Agency, per se, cannot be taken as a good ground to accept the plea of the assessee, considering the fact that consistently the advances given to the Directors had increased from Rs.3.23 crores to Rs.3.91 crores without corresponding return thereof and with no better performance in the business of the assessee. In the circumstances, the arguments placed by assessee rejected. As far as the reliance placed on the decision of CIT V. Kandagiri Spinning Mills Ltd [2007 (4) TMI 182 - MADRAS HIGH COURT] the same is distinguishable for the simple reason that the decision rested on the factual findings therein in that case by the Commissioner of Income Tax (Appeals) as well as by the Tribunal. As rightly pointed out by the Tribunal, when the assessee had not showed any such nexus of the borrowed funds utilised in the business and continued to be used in the business, no hesitation in confirming the order of the Tribunal. Issues:1. Disallowance of interest on borrowed funds without nexus to advances given to Directors.2. Utilization of borrowed funds for business purposes.3. Allowance of interest deduction based on submissions and evidences.Issue 1: Disallowance of interest on borrowed funds without nexus to advances given to DirectorsThe case involved an appeal against the disallowance of interest payment by the assessee, who had advanced loans to Directors. The Assessing Officer contended that the borrowed funds were diverted for advancing loans to Directors, leading to the disallowance of interest payment. The Commissioner of Income Tax (Appeals) rejected the appeal, stating that there was no nexus between the borrowed funds and the advances to Directors. The Tribunal also rejected the appeal, emphasizing the lack of proof that the borrowed funds were used exclusively for business purposes. The Court upheld the Tribunal's decision, highlighting the consistent increase in advances to Directors without corresponding returns, indicating a diversion of borrowed funds.Issue 2: Utilization of borrowed funds for business purposesThe assessee argued that the borrowed funds were used for purchasing goods for business, specifically Masoor Dhall. However, the Court found insufficient evidence to support this claim. The Court emphasized that the borrowed funds should not only be invested but also remain in the business to claim interest deduction. As the assessee failed to establish a clear nexus between the borrowed funds and business usage, the Court confirmed the Tribunal's decision to disallow the interest payment.Issue 3: Allowance of interest deduction based on submissions and evidencesThe assessee relied on a previous court decision to support their claim that advances to Directors were out of commercial expediency and not from borrowed funds. However, the Court distinguished the cited case, noting the lack of similar factual findings in the present case. The Court reiterated that without concrete evidence of borrowed funds being used solely for business purposes, the interest deduction cannot be allowed. Therefore, the Court dismissed the appeal, affirming the Tribunal's decision.