Assessee's Appeal Granted: Interest Disallowance Overturned, Eligible for Deduction

The Tribunal allowed the appeal of the assessee, setting aside the disallowance of interest in the sum of Rs. 8,23,459/-, based on the utilization of borrowed funds for lending purposes, making the interest paid eligible for deduction under section 36(1)(iii) of the Act.

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Issues:
The only issue to be decided in this appeal is whether the disallowance of interest in the sum of Rs. 8,32,459/- was justified.

Details of the Judgment:

Issue 1: Disallowance of Interest
The Assessing Officer (AO) observed that the assessee company, engaged in lending, had debited a sum of Rs. 1,18,79,501/- towards interest paid on unsecured loans, while also receiving interest income of Rs. 1,10,56,045/- on loans and advances given. The AO concluded that the assessee had diverted borrowed funds for advancing interest-free loans to certain parties, leading to the disallowance of excess interest paid. This action was upheld by the ld. CIT(A).

Issue 2: Arguments by the Assessee
The ld. AR argued that during the relevant year, the assessee had sufficient interest-free funds, which were used for interest-free loans. Referring to a previous Tribunal decision in the assessee's case, the AR contended that the disallowance under section 36(1)(iii) of the Act was not warranted.

Issue 3: Revenue's Counter-Argument
The Ld. DR contended that as a non-banking finance company (NBFC), the main income source being interest, the assessee should have earned more interest income than paid on borrowings, irrespective of the availability of interest-free funds.

Issue 4: Tribunal's Decision
The Tribunal noted that the assessee's borrowing was utilized for lending purposes, making the interest paid eligible for deduction under section 36(1)(iii) of the Act. Citing relevant legal precedents, including a decision of the Hon'ble Supreme Court, the Tribunal held that the disallowance of excess interest paid was not justified. Relying on the principles laid down in a previous decision in the assessee's case, the Tribunal directed the AO to delete the disallowance of interest in the sum of Rs. 8,23,459/-.

Conclusion
The Tribunal allowed the appeal of the assessee, setting aside the disallowance of interest. The order was pronounced in the open court on 18/04/2023.

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