2019 (1) TMI 931 - AT - Income Tax

Court rules interest expenditure claim valid under IT Act, overturning Assessing Officer decision.

The DCIT Central Circle-1 Ludhiana Versus M/s Genex Industries Ltd.

The DCIT Central Circle-1 Ludhiana Versus M/s Genex Industries Ltd. - TMI Issues:1. Disallowance of interest expenditure under section 36(i)(iii) of the Income Tax Act, 1961.2. Allowance of interest under section 36(i)(iii) of the Income Tax Act, 1961 for non-business purposes.Analysis:Issue 1: Disallowance of interest expenditure under section 36(i)(iii) of the Income Tax Act, 1961:The Assessing Officer disallowed the interest expenditure of Rs. 7,18,09,666 debited to the Profit and Loss Account, alleging that the assessee diverted interest-bearing funds to related concerns without business consideration. The AO relied on the Punjab and Haryana High Court decision in Abhishek Industries. The appellant contended that the disallowance was unjustified as no opportunity to explain was provided, and the interest claimed was for specific purposes, not related to advances to related entities. The appellant highlighted the increase in share capital and premium, demonstrating availability of interest-free funds. The CIT(A) upheld the appellant's contentions, citing the Hero Cycles Supreme Court decision and other High Court judgments, concluding that the AO was unjustified in disallowing the interest claimed under section 36(i)(iii) of the IT Act.Issue 2: Allowance of interest under section 36(i)(iii) of the Income Tax Act, 1961 for non-business purposes:The Revenue raised concerns regarding the allowance of interest under section 36(i)(iii) for non-business purposes. The appellant argued that the interest claimed was on loans sanctioned for specific purposes and not related to advances to related entities. The appellant emphasized the turnover and purpose of loans raised for business activities. The CIT(A) considered the availability of interest-free funds, previous year's financial position, and judicial decisions to conclude that the AO was not justified in disallowing the interest claimed under section 36(i)(iii) of the IT Act. The Tribunal confirmed the CIT(A)'s order based on factual analysis and legal precedents, dismissing the Revenue's appeal.In summary, the judgment addressed the disallowance and allowance of interest expenditure under section 36(i)(iii) of the Income Tax Act, 1961, emphasizing the availability of interest-free funds, specific purposes of loans, and relevant judicial decisions to support the conclusions reached by the CIT(A) and Tribunal.