2014 (4) TMI 903 - AT - Income Tax

Tribunal directs taxing interest on diverted funds, ensuring justice.

Sri Chanda Anjaiah Parameshwar Versus The Addl. CIT Range-10, Hyderabad

Sri Chanda Anjaiah Parameshwar Versus The Addl. CIT Range-10, Hyderabad - TMI Issues Involved:1. Disallowance of interest on advances due to alleged diversion of funds.2. Restriction of interest allowance for advances for periods less than 10 days.3. Security provided by individuals for obtaining loan facilities.Issue-Wise Detailed Analysis:1. Disallowance of Interest on Advances Due to Alleged Diversion of Funds:The assessee, engaged in trading bullion, faced disallowance of Rs. 28,93,009/- in interest by the AO, who argued that funds borrowed for business purposes were diverted to non-interest-bearing accounts of HUF members. The assessee contended that sufficient non-interest-bearing funds were available and the advances were short-term, primarily to meet bank requests for maintaining balances. The CIT(A) noted that amounts borrowed were indeed diverted to personal accounts, but accepted the assessee's argument to exclude short-term balances from interest calculations. The CIT(A) directed the AO to recompute interest on debit balances exceeding 10 days.2. Restriction of Interest Allowance for Advances for Periods Less Than 10 Days:The CIT(A) restricted the allowance of interest on advances for periods less than 10 days, acknowledging the commercial expediency of maintaining balances as requested by the bank. The CIT(A) directed the AO to exclude such short-term debit balances from the disallowance calculation. However, the Tribunal found this direction improper, stating that if commercial expediency was recognized, the interest earned on such advances should be taxed as the assessee's income, not the family members'.3. Security Provided by Individuals for Obtaining Loan Facilities:The assessee argued that advances were secured by the individuals' immovable properties, which the CIT(A) did not specifically address. The Tribunal's decision implied that the security aspect was secondary to the primary issue of fund diversion and commercial expediency.Tribunal's Conclusion:The Tribunal concluded that the CIT(A) correctly identified commercial expediency but erred in limiting the interest disallowance to periods exceeding 10 days. It directed the AO to tax the interest earned on the diverted funds in the assessee's hands, ensuring justice. The appeal was partly allowed, and the order was pronounced on 4th March 2014.