Tribunal rules on interest disallowance under Income Tax Act, favors assessee. Verification of set-off upheld.

The Tribunal partly allowed the appeal, ruling in favor of the assessee on the disallowance of interest under Section 36(1)(iii) of the Income Tax Act. The Tribunal held that no disallowance could be made on a proportionate basis if lending is part of the business activities without diversion of borrowed funds for non-business purposes. However, the Tribunal upheld the Commissioner of Income Tax (Appeals)'s direction for the verification of the set-off of business loss and unabsorbed depreciation against total income.

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Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Claim of set-off of business loss and unabsorbed depreciation against total income.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii) of the Income Tax Act:

The primary issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in upholding the disallowance of interest under Section 36(1)(iii) of the Income Tax Act on a proportionate basis. The assessee, a public limited company engaged in providing financial services, had declared an interest income of Rs. 12,96,57,884 and debited interest and finance charges amounting to Rs. 12,95,71,373. The Assessing Officer (AO) observed that the assessee had borrowed funds at a higher rate of interest and lent them at a lower rate, leading to a differential rate of interest of 1.41%, which was disallowed proportionately.

The assessee argued that it had received more interest than it paid, and thus no disallowance was warranted. The CIT(A) recalculated the average rate of interest paid and received, concluding that the assessee borrowed at an average rate of 13.5% and lent at an average rate of 12.40%, resulting in a differential rate of 1.1%. Consequently, the CIT(A) restricted the disallowance to Rs. 70,16,489.

Upon review, the Tribunal noted that the assessee had mixed funds (own and borrowed) and was engaged in financing activities, including lending to sister concerns with interest charged. The Tribunal emphasized that the test of commercial expediency should be viewed from the businessman’s perspective, not the revenue’s. Citing the Supreme Court decision in CIT vs. Dhanrajgiri Raja Narasingirji (91 ITR 544), the Tribunal held that once lending is part of the business activities and there is no finding of diversion of borrowed funds for non-business purposes, no disallowance of interest under Section 36(1)(iii) can be made on a proportionate basis. Therefore, the Tribunal allowed the assessee's ground on this issue.

2. Claim of Set-off of Business Loss and Unabsorbed Depreciation:

The second issue pertained to the assessee's claim of set-off of business loss of Rs. 16,29,034 and unabsorbed depreciation of Rs. 14,75,566 against its total income. The AO disallowed this claim due to discrepancies between the details furnished in the return of income and those submitted during the assessment proceedings, which the assessee failed to reconcile. The CIT(A) directed the AO to verify the brought forward/carry forward losses and compute the correct set-off amount as per law.

The Tribunal found no error in the CIT(A)'s direction for verification by the AO, asserting that the assessee could not be aggrieved by such a direction. Hence, the Tribunal upheld the CIT(A)'s order on this issue and dismissed the assessee’s ground.

Conclusion:

The appeal of the assessee was partly allowed. The Tribunal ruled in favor of the assessee on the disallowance of interest under Section 36(1)(iii), but upheld the CIT(A)'s direction regarding the verification of the set-off of business loss and unabsorbed depreciation.

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