ALCHEMIC DYE CHEM PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 15(1)(1), MUMBAI

Interest expenditure incurred was for the purposes of business of the Appellant and accordingly the claim was allowable in terms of the provisions of section 36(1)(iii) of the Income-tax Act, 1961, [‘the Act’].

There is no provision under the Act to tax notional income, which has not been realized by the Appellant;

The action of the Assessing Officer is beyond jurisdiction;

Borrower was not a related party of the Appellant and in absence thereof the ClT(A) was not justified in confirming the action of the Assessing Officer to disallow interest.

We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee Shri Vijay Mehta argued that the assessee is engaged in Finance and Investments activity and for that purpose it operates funds at 4 given rate and advances the same at suitable interest rates. During the year, the assessee has earned net interest income of Rs. 14,55,151/- from its lending business. It was contended that the assessee company has advanced loan of Rs. 3.23 crores to Aakansha Pharma Chem Pvt. Ltd. at the rate of 8% per annuam, Rs. 2.5 crores to Arti Drugs Ltd. at the rate of 10% and Rs. 10 lacs to SNG overseas Ltd. at the rate of 12%. The learned Counsel for the assessee argued that the AO disallowed interest expenditure under section 36(1)(iii) of the Act on the ground that the fund borrowed at higher interest cost of 14% were advanced to the above entities at the lower interest rates. Hence, the disallowance was made. He argued that merely because borrowings were for advancement of loan companies which yielded a lesser lending rate then average borrowing rate the differential rate of interest cannot be disallowed and it to be viewed from a competent businessmen perspective. He stated that the operated amounts given to the entities are not for any personal purposes but its main business object. The learned Counsel for the assessee argued that the assessee being engaged in the business of finance and finance lending, the decision of grant loan and advances and charging of interest is very part of business which is governed by various market factors. Hence, earning of net interest income, the fact that the funds advanced by assessee are recoverable on demand and easily liquid able. In view of the above, it was argued that interest expenditure is incurred entirely for the purpose of business and therefore disallowance of interest expenditure under section 36(1)(iii) of the Act is without any basis. On the other hand, the learned Sr. DR supported the orders of the lower authorities.

We have heard the rival contentions and gone through the facts and circumstances of the case. We are noted that the assessee has borrowed funds for the purpose of its business of lending and investing. The sole purpose for borrowing funds is to advance funds to other parties 5 and thereby earning interest income, which is offered to tax as business income. From the perusal of the balance sheet, it is clear that the funds raised by assessee are purely used for advances and lending to various parties and these funds have been deployed for no purposes other than lending or financing. This is also administrated from the fact that during the year the amounts on loan advanced by assessee have reduced substantially and also the borrowings made by assessee have reduced. It is also clear from the profit and loss account that apart from lending no other activities are undertaken by the assessee and hence, it cannot be said that the interest expenditure incurred is not for the purpose of the business. The assessee has disclosed the income and expenditure in the statement of profit and loss account, which broadly comprises following: - Sr. Particulars Amount In (₹)_ No. 1. Income Interest income on loans advanced 1,53,48,327 Interest on deposit 57,641 Other income 14 Income tax refund 38,357 2. Expenditure Interest Expenditure 13,893,176 Office and Administrative expenditure 39,649 3. Net Profit before tax 1,511,514 7. Even the provisions of section 37(1) of the Act clearly states that any expenditure not claimed under section 30 to 36 of the Act will be allowed as deduction under this section if it is wholly and exclusively incurred for the purpose of business. In our view the provisions of section 37(1) of the Act makes it clear that disallowance can be made only when the expenditure is not covered by the provisions of section 30 to 36 of the Act. We find that the interest expenditure incurred by the assessee and the borrowings was for the purpose of business and hence deduction is allowable under the provisions of section 36(1)(iii) of the Act. Whether for the sake of clarity, we will reproduce the provisions of section 37(1) of the Act which read as under: - 6 “(1) Any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession.”

In view of the above, we are of the view that it could be observed that for the allowable of expenditure under section 37(1) of the Act, the following criteria are to be fulfilled: - “The expenditure should not be of nature described in section 30 to 36. The expenditure should not be in the nature of personal or capital expenditure.

In view of the above facts and circumstances, we are of the view that the assessee is entitled for the claim of interest expenditure as deduction and we allow the same. The appeal of the assessee is allowed.

In the result, the appeal of assessee is allowed.