2020 (3) TMI 1220 - AT - Income Tax

Tribunal overturns disallowance of interest expenses, emphasizes business purpose nexus.

The Tribunal allowed the appeal, concluding that the disallowance of Rs. 5,53,024 interest expenses was not justified. It held that the assessee had ... Addition of interest expenses - addition made on the basis that the assessee has filed only a written explanation but has not provided the evidences proving nexus between the expenditure incurred and the interest free fund available - HELD THAT:- As perused the materials available on record and gone through the orders of the authorities below. The assessee has demonstrated that the assessee had made investment in fixed assets namely Oil Mill Machinery of ₹ 34,35,045/- and Oil Mill Building of ₹ 20,95,190/- totaling to ₹ 55,30,235/- during the year. The Assessee has submitted during the Assessment Proceedings that funds which were invested in fixed assets were out of funds available in the capital account. It is also stated that the loan which was taken by the assessee was utilized for the purpose of business. In support of this contention the assessee has drawn my contention to the inventory, sundry debtors, cash and bank, loans and advances. Hence, it is stated that the entire amount of loan of ₹ 21,21,57,670/- was utilized for the purpose of business of the assessee. This fact is not rebutted by the revenue, therefore, assessing officer is hereby directed to delete the addition. - Decided in favour of assessee. Issues Involved:1. Disallowance of interest expenses amounting to Rs. 5,53,024.Detailed Analysis:1. Disallowance of Interest Expenses:Background:The primary issue in this appeal is the disallowance of Rs. 5,53,024 out of the total interest expenses claimed by the assessee. This is the second round of litigation, with the matter previously restored to the file of the assessing officer (AO) by the Tribunal for fresh consideration.Assessee's Submissions:The assessee, engaged in the business of ginning and pressing of cotton, trading of cotton bales, cotton seed, and cotton seed oil, filed an income tax return for the assessment year (AY) 2009-10 declaring a total income of Rs. 35,45,190. The AO, in the original assessment, added Rs. 5,53,024 to the income on the grounds that the assessee failed to provide evidence proving the nexus between the expenditure incurred and the interest-free funds available.Proceedings and Findings:- The AO observed that the assessee had taken secured and unsecured loans which increased substantially from the preceding year and had made investments in fixed assets totaling Rs. 55,30,235 during the year.- The AO disallowed Rs. 5,53,024 out of the interest paid, calculating notional interest at 10% on the investment in fixed assets.- The assessee argued that the funds invested in fixed assets were from the capital account and provided a detailed balance sheet showing interest-free funds amounting to Rs. 23,87,66,146.- The assessee further demonstrated that the entire loan amount of Rs. 21,21,57,670 was utilized for business purposes, including inventory, sundry debtors, cash and bank, and loans and advances.Legal Precedents and Tribunal's Decision:- The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments in fixed assets and that the AO failed to establish a nexus between interest-bearing funds and non-business purposes.- The Tribunal relied on several judgments, including CIT vs. Reliance Utilities & Power Limited (313 ITR 340), which established that if interest-free funds are sufficient to meet investments, it should be presumed that investments were made from those funds.- The Tribunal also referred to the case of Hero Cycles V/s CIT, where it was held that no disallowance can be made if the nexus between expenditure and business purpose is established.- The Tribunal observed that the AO did not rebut the assessee's claim that the loans were utilized for business purposes and directed the AO to delete the addition of Rs. 5,53,024.Conclusion:The Tribunal allowed the appeal filed by the assessee, concluding that the disallowance of Rs. 5,53,024 out of the interest paid was not justified, as the assessee had sufficient interest-free funds to cover the investments in fixed assets and the loans were utilized for business purposes. The order was pronounced in the open court on 06.03.2020.