2014 (12) TMI 880 - AT - Income Tax

Tribunal Upholds Assessee's Interest Deductions, Emphasizes Business Necessity

The Asstt. Commissioner of Income Tax Versus M/s. HH. Patel & Company

The Tribunal upheld the Ld. CIT(A)'s decisions for Assessment Years 2009-10 and 2010-11, ruling in favor of the assessee in disallowance cases under ... Disallowance of interest paid u/s 40A(2)(b) - excessive claim - borrowed funds from relatives invested in FDRs or not and FDRs could be part of business activity or incidental to business of assessee or not - Held that:- In respect of the disallowance u/s. 36(1)(iii), the reservation of the AO is that the assessee made the FD with the State Bank of India, Chalisgaon to the extent of ₹ 4.25 Crores and earned the lower rate of interest when at the same time the assessee had unsecured loans to the extent of ₹ 4.75 Crores on the date of balance sheet on which the assessee has paid interest @ 12% on the said loans - during the year the salary was also credited to the partner of the HUF and the interest was also credited - There were another transfer entry in respect of same account also as well as withdrawal to the extent of ₹ 1,31,51,907/- the assessee has only borrowed ₹ 26 Lacs. The assessee also explained that there is tedious procedure if the money is borrowed from the bank and even then rate of interest is 14.25% + additional mortgage fee of 1%, documentation processing etc. - assessee also explained that as per the provisions of Sec. 40(b) while computing income of the firm, the interest @ 12% p.a. is allowable on credit balances on the partners’ accounts - the borrowing was made for the purpose of business - merely variation in the rate of interest cannot be the reasons for making the disallowance – thus, the order of the CIT(A) is upheld – Decided against revenue. Addition on difference on rate of borrowing and rate on deposits made in banks deleted – Held that:- In assessee’s own case for the earlier assessment year, it has been held that the addition made by the AO is to be set aside – thus, the decision as delivered is to be followed and the order of the CIT(A) is upheld – Decided against revenue. Issues:- Disallowance under section 40A(2)(b) of the Income Tax Act, 1961 for Assessment Years (A.Y.) 2009-10 and 2010-11.Analysis:1. A.Y. 2009-10 Disallowance:- The Revenue challenged the deletion of an addition of Rs. 29,21,991 under section 40A(2)(b) by the Ld. CIT(A).- The Assessing Officer contended that borrowed funds were invested in Fixed Deposits (FDs) not related to business, leading to disallowance.- The Ld. CIT(A) upheld the assessee's position that borrowing for business purposes justifies interest deduction, irrespective of how funds were utilized.- Various legal precedents supported the deduction of interest on borrowed funds, emphasizing business necessity over investment choices.- The Ld. CIT(A) considered the totality of facts and legal positions, concluding that no disallowance was justified, canceling the addition.2. A.Y. 2010-11 Disallowance:- The Revenue contested the deletion of additions totaling Rs. 27,61,283 for differences in interest rates and excess interest payments.- The Assessing Officer disallowed interest based on variations in interest rates on FDs and unsecured loans, questioning business relevance.- The Ld. CIT(A) echoed the decision for A.Y. 2009-10, emphasizing the business purpose of borrowing and rejecting interest disallowance.- The Tribunal upheld the Ld. CIT(A)'s order, dismissing the Revenue's appeal for A.Y. 2010-11 based on similar reasoning as the previous year.In both cases, the Tribunal affirmed the Ld. CIT(A)'s decisions, emphasizing the business necessity of borrowing over the specific utilization of funds. The judgments highlighted that interest deductions should align with the purpose of borrowing for business activities, rather than focusing on the investment choices made by the assessee. Legal precedents and the overall business context played a crucial role in determining the allowability of interest expenses, leading to the dismissal of the Revenue's appeals for both assessment years.