2015 (9) TMI 1055 - HC - Income Tax

Court Upholds Disallowance of Interest Deduction for Non-Business Loan Usage

M/s Embassy Development Corporation Versus The Assistant Commissioner of Income-Tax

The High Court upheld the Tribunal's decision to disallow the interest deduction claimed by the assessee, a partnership firm, on a borrowed loan that was ... Disallowance of interest on borrowed loan - Held that:- In the instant case, though the borrowed money was advanced in favour of the sister concern of the assessee in the year 1999-2000, the sister concern has also not utilized the said amount for the said purpose. Even after three years, the said project has not been commenced, however the sister concern has diverted the said amount for some other project.The Tribunal, after examining the contention taken by the assessee, confirmed the order passed by the First Appellate Authority as well as the Assessing Authority. We find that there is no infirmity or irregularity in the finding of the Tribunal. The finding recorded by the authorities below is purely a question of fact and the same is not liable to be interfered with by this Court. SA BUILDERS LTD. Versus COMMISSIONER OF INCOME-TAX case [2006 (12) TMI 82 - SUPREME COURT] not applicable on assessee - Hence, the substantial questions of law framed in these appeals are answered against the assessee Issues Involved:1. Disallowance of interest on borrowed loan.2. Application of the principle of commercial expediency.3. Precondition of earning income for allowing expenditure under Section 36(iii) of the Income Tax Act.4. Non-application of precedents set by the Supreme Court in similar cases.Issue-wise Detailed Analysis:1. Disallowance of Interest on Borrowed Loan:The assessee, a partnership firm engaged in real estate and construction, borrowed Rs. 2.50 crores from KSIIDC as a medium-term corporate loan. This amount was subsequently advanced to its sister concern, Dynasty Developers Private Limited (DDPL), purportedly as a sale consideration for acquiring a portion of the property in the project 'Embassy Meadows.' The Assessing Officer disallowed the interest expenditure claimed by the assessee on the grounds that the borrowed amount was not utilized for the assessee's business but was diverted to its sister concern. The Tribunal upheld this view, noting that the sister concern had not utilized the amount for the intended project, thus disallowing the interest deduction.2. Application of the Principle of Commercial Expediency:The assessee argued that the advance to its sister concern was a measure of commercial expediency, citing the Supreme Court's ruling in S.A. Builders Ltd. v. CIT, which allows interest on money borrowed and lent to a sister concern if it serves the business purpose of the assessee. However, the Tribunal found no evidence of commercial expediency, as the project 'Embassy Meadows' had not commenced, and the sister concern had not utilized the funds for the said project. The Tribunal, therefore, concluded that the transaction was a loan rather than a business advance.3. Precondition of Earning Income for Allowing Expenditure under Section 36(iii):The Tribunal held that earning income is a precondition for allowing expenditure under Section 36(iii) of the Income Tax Act. The assessee's claim for interest deduction was disallowed because the borrowed funds were not used for the assessee's business, and no income had accrued from the supposed project. The Tribunal emphasized that the funds were diverted to the sister concern without any formal agreement or evidence of business necessity.4. Non-application of Precedents Set by the Supreme Court:The assessee cited several Supreme Court judgments, including CIT v. Rajendra Prasad Moody and CIT v. Indian Bank Limited, to support its claim for interest deduction. However, the Tribunal found these precedents inapplicable to the facts of the case. It noted that in S.A. Builders, the Supreme Court had clarified that interest on borrowed funds could only be allowed if the funds were advanced for commercial expediency. In this case, the Tribunal found no such expediency, as the borrowed funds were not utilized for the intended project, and the sister concern had not commenced the project even after three years.Conclusion:The High Court upheld the Tribunal's findings, concluding that the assessee failed to establish commercial expediency and that the borrowed funds were not used for the assessee's business. The court dismissed the appeals, answering all substantial questions of law against the assessee and in favor of the Revenue. The court emphasized that the principle of commercial expediency must be established with concrete facts, and in this case, the assessee could not demonstrate that the advance to its sister concern was for business purposes.