2018 (3) TMI 1998 - AT - Income Tax

Tribunal overturns interest disallowance under Income Tax Act, 1961, finding borrowed funds used for business.

Shri Vijay Pal Garg Versus DCIT, Central Circle-5, New Delhi

The Tribunal allowed the appeal, overturning the disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961. It found that the borrowed ... Disallowance of Interest - borrowed funds were utilized for the purpose other than business activities or not - HELD THAT:- According to the balance sheet of the assessee, the unsecured loans of Rs.6.05 crores are available to the assessee and as per contention of the Ld. Counsel for the assessee, the interest free advance of Rs.5.48 crores are available to the assessee which exceeded the loan amount of Rs.4.36 crores. Therefore, the assessee had sufficient funds other than borrowed funds for giving the amount in question as loan to others and such findings of fact have not been rebutted by the Revenue authorities. Thus, the conditions of section 36(1)(iii) of the Act have been complied with in this case. Further, the assessee specifically pleaded before Ld.CIT(A) that borrowed funds of the assessee are for a sum of Rs. 5.15 crores and utilization of the borrowed funds are of Rs.5.22 crores in making deposit with the bank, cash in hand and fixed assets which also tally with the balance sheet of the assessee. Therefore, Ld. Counsel for the assessee rightly contended that the amount of loans on which interest has been paid, has been used for the purpose of business. In the case of COMMISSIONER OF INCOME-TAX AND ANOTHER VERSUS RADICO KHAITAN LTD. [2004 (9) TMI 37 - ALLAHABAD HIGH COURT], Hon’ble Allahabad High Court decided the issue in favour of the assessee in which the finding recorded by the Tribunal was that “the assessee company had sufficient funds other than the borrowed money for giving the amount in question as loan to its sister concern, which finding had not been specifically challenged in the present appeal, the conditions of section 36(1)(iii) of the Act had been complied with and, therefore, the assessee company was entitled to full allowance of the amount of the interests paid by it on borrowed capital.” The assessee, therefore, proved that borrowed funds have been used for the purpose of business, therefore, no disallowance u/s 36(1)(iii) of the Act could be made - Appeal of assessee allowed. Issues:1. Disallowance of interest u/s 36(1)(iii) of the Income Tax Act, 1961.Analysis:The appeal was against the disallowance of Rs.45,06,817 as interest under section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer (AO) noted that the funds raised by the assessee were not utilized for the business purpose, leading to the disallowance. The assessee argued that the borrowed funds were used for business assets, making the interest payment a legitimate business expense. The Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the funds were not explained to be used for business, and the AO's case laws were applicable. The assessee further presented evidence showing that the borrowed funds were indeed used for business purposes, citing relevant case laws. The Tribunal found that the assessee had sufficient funds other than borrowed funds for giving loans, meeting the conditions of section 36(1)(iii). The Tribunal also noted that there was no nexus between the borrowed funds and the interest-free amounts given by the assessee. Relying on precedents and the evidence presented, the Tribunal set aside the lower authorities' orders and deleted the disallowance of Rs.45,06,817.Therefore, the Tribunal allowed the appeal, emphasizing that the borrowed funds were used for business purposes, meeting the requirements of section 36(1)(iii) of the Act. The decision was based on the evidence presented, relevant case laws, and the absence of a connection between the borrowed funds and interest-free transactions.