2016 (8) TMI 604 - AT - Income Tax

Tribunal rejects assessee's claims on diverted borrowed funds for non-business purposes

The Tribunal upheld the disallowance of Rs. 81,95,426/- by the Assessing Officer, rejecting the assessee's claims under sections 57(iii) and 36(1)(iii) of ... Income from other sources - deduction wholly and exclusively for purpose of earning such income - Interest on borrowed capital - purpose of business - Sham transaction / diversion of funds - Onus of proof on the assessee to establish borrowings made for business purposeIncome from other sources - deduction wholly and exclusively for purpose of earning such income - Sham transaction / diversion of funds - Deductibility of interest expenditure under section 57(iii) in computing income from other sources - HELD THAT: - The Tribunal held that a deduction under section 57(iii) is permissible only where the expenditure is incurred wholly and exclusively for the purpose of making or earning the income under that head. The assessee's case that borrowed funds were used to acquire land and therefore the interest was incurred for earning interest income was rejected on facts. The transaction with the sister concern (PEPPL) was found to be an afterthought and a facade - advances were made before finalisation of sale and were interest free to a substantial shareholder, indicating diversion of funds. Consequently the interest expenditure was not incurred wholly and exclusively for the purpose of earning income from other sources and is not allowable even to the extent of excess over interest received; the entire interest relating to the borrowings was held not allowable under section 57(iii). [Paras 5, 6]Claim for deduction under section 57(iii) rejected; interest expenditure disallowed as not incurred wholly and exclusively for purpose of earning income from other sources.Interest on borrowed capital - purpose of business - Onus of proof on the assessee to establish borrowings made for business purpose - Allowability of interest as business expenditure under section 36(1)(iii) - HELD THAT: - The Tribunal examined the alternative plea under section 36(1)(iii) that interest on borrowed capital is allowable if the borrowing was for the purpose of business. While the taxing authorities may not ordinarily question the commercial necessity of borrowing, the assessee bears the onus to prove that the borrowings were for business purposes. The assessee failed to discharge this onus: payments were advanced to a related concern before verification of title and the correspondence was treated as self serving. In view of the disbelief of the asserted business purpose and the finding of diversion/sham, the Tribunal held that the interest cannot be allowed as a business deduction under section 36(1)(iii), and this applies to the entire interest incurred on the bank borrowings in issue. [Paras 5, 6]Alternative claim under section 36(1)(iii) rejected; entire interest on the borrowings disallowed for want of proof that borrowings were for business purpose.Final Conclusion: The appeal is dismissed; the disallowance of interest relating to the borrowings for Assessment Year 2009-10 is upheld on the grounds that the expenditure was not incurred wholly and exclusively for earning income from other sources and the assessee failed to prove the borrowings were for business purpose, the transaction being treated as diversion/sham. Issues Involved:1. Legality of the CIT(A)'s unsigned order.2. Disallowance of Rs. 81,95,426/- by the AO.3. Levy of interest under section 234B of the Act.Issue-wise Detailed Analysis:1. Legality of the CIT(A)'s unsigned order:The assessee contended that the order passed by the CIT(A) was unsigned, thereby rendering it 'bad in law and liable to be quashed.' However, this issue was not elaborated upon in the judgment, and the primary focus remained on the substantive issues of disallowance and interest levy.2. Disallowance of Rs. 81,95,426/- by the AO:The core issue was the disallowance of Rs. 81,95,426/- by the AO, which was confirmed by the CIT(A). The AO disallowed this amount on the grounds that the interest-bearing funds were diverted for non-business purposes. The assessee had borrowed funds from Union Bank of India and advanced Rs. 33.50 crores to M/s Prestige Estate Projects Pvt. Ltd. (PEPPL) as an advance for purchasing property. However, the transaction did not materialize, and the amount was returned.The AO and CIT(A) both concluded that the transaction was a facade to cover up interest-free loans given to PEPPL, a shareholder with a substantial interest in the assessee company. The AO noted that the assessee failed to provide a formal agreement and relied on correspondence that appeared to be an afterthought. The CIT(A) agreed with the AO, stating that the advance was given without interest to PEPPL, indicating a diversion of funds for non-business purposes.The assessee argued that the borrowed funds were eventually utilized for lending to shareholders at a higher interest rate than the bank's rate, and the loss was due to a timing difference. However, the Tribunal found that the borrowings were not made for the purpose of earning interest income, thus disallowing the claim under section 57(iii) of the Act. The Tribunal also rejected the alternative claim under section 36(1)(iii), as the assessee failed to prove that the borrowings were made for business purposes.3. Levy of interest under section 234B of the Act:The assessee contended that the interest levied under section 234B was not applicable. However, the Tribunal did not provide a detailed discussion on this issue, as the primary focus was on the disallowance of the interest expenditure.Conclusion:The Tribunal dismissed the appeal, upholding the disallowance of Rs. 81,95,426/- and rejecting the claims under sections 57(iii) and 36(1)(iii) of the Act. The order pronounced on 24th June 2016 confirmed the findings of the lower authorities, emphasizing that the borrowings were not for business purposes and the transaction with PEPPL was a sham.