2006 (1) TMI 207 - AT - Income Tax

Court allows company's appeal, disallows interest, disagreement on remand, appeals allowed for statistical purposes.

Kumaragiri Textiles Ltd. Versus Deputy Commissioner Of Income-tax, Spl. Range - Iv.

The disallowance of interest on non-business purpose investment was the main issue in this case involving appeals by a limited company. The court found ... Interest On Borrowed Capital Issues:1. Disallowance of interest on the ground of non-business purpose investment.2. Disagreement between Senior Vice President and Judicial Member on the disallowance of interest.Issue 1: Disallowance of Interest on Non-Business Purpose Investment:The case involved appeals by the assessee, a limited company, regarding the disallowance of interest due to the investment not being made for business purposes. The Assessing Officer disallowed interest in excess of 15 percent, alleging diversion of funds. However, the CIT(A) found that the assessee had free reserves and surplus funds available for advancing to sister concerns. The assessee demonstrated through statements of funds that it had generated enough funds to support the investments made. For both assessment years, the assessee showed that it had funds available from which it advanced money, thus refuting the claim of diverting borrowed funds. Consequently, the disallowance was deleted for both assessment years.Issue 2: Disagreement Between Senior Vice President and Judicial Member:The disagreement arose between the Senior Vice President and the Judicial Member regarding the disallowance of interest on the grounds of diverting borrowed funds to sister concerns without charging interest. The Judicial Member disagreed with the Senior Vice President's decision to delete the disallowance and opined that the matter should be remanded back to the Assessing Officer for further adjudication. The Judicial Member emphasized that the burden of proof lies with the assessee to demonstrate that borrowed funds were not used for advancing to sister concerns. As the assessee failed to discharge this burden adequately, the issue should be reconsidered by the Assessing Officer. Ultimately, the Third Member concurred with the decision of the Judicial Member, leading to the appeals of the assessee being allowed for statistical purposes.This judgment highlights the importance of demonstrating the source of funds for investments and the burden of proof on the assessee in tax matters. The disagreement between the Senior Vice President and the Judicial Member underscores the complexities involved in assessing financial transactions and the need for thorough evidence to support claims in tax cases.