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Facts
The assessee firm, engaged in investment and finance, had interest disallowed by the Assessing Officer under Section 36(1)(iii). The CIT(A) deleted this disallowance. The Revenue appealed against this deletion.
Held
The Tribunal noted that the assessee had made a suo motu disallowance but lacked detailed justification. It was found that borrowed funds might not have been entirely for business purposes. Consequently, the issue was restored to the Assessing Officer for a fresh determination.
Key Issues
Whether the disallowance of interest under Section 36(1)(iii) was correctly deleted by the CIT(A) and whether the borrowed funds were utilized for business purposes.
Sections Cited
36(1)(iii)
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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SUNIL KUMAR SINGH
This appeal by the Revenue is directed against order dated 19.03.2024 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2015-16, raising following ground:
1. On the facts an On the facts and in the circumstances of the case and in law, the Ld. d in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest of Rs. CIT(A) erred in deleting the disallowance of interest of Rs. CIT(A) erred in deleting the disallowance of interest of Rs.173489190/- u/s 36(1)(iii) of the Income Tax Act. u/s 36(1)(iii) of the Income Tax Act.
2. Briefly stated, facts of the case are that the assessee firm Briefly stated, facts of the case are that the assessee firm Briefly stated, facts of the case are that the assessee firm is engaged in business of investment business of investment and finance activity. In the finance activity. In the assessment completed u/s 143(3) of the Income assessment completed u/s 143(3) of the Income-tax tax Act, 1961 (in short ‘the Act’), the Assessing Officer disallowed interest of he Assessing Officer disallowed interest of he Assessing Officer disallowed interest of Rs.17,34,89,190/- u/s 36(1)(iii) of the Act u/s 36(1)(iii) of the Act
3. On further appeal, the Ld. CI On further appeal, the Ld. CIT(A) deleted the said addition. T(A) deleted the said addition. Aggrieved, the Revenue preferred appeal before the Income the Revenue preferred appeal before the Income-tax the Revenue preferred appeal before the Income Appellate Tribunal (in short ‘ITAT’) raising the Appellate Tribunal (in short ‘ITAT’) raising the sole ground sole ground as reproduced above.
Despite notifying neither anyone attended on behalf of the Despite notifying neither anyone attended on behalf of the Despite notifying neither anyone attended on behalf of the assessee, nor was any adjournment any adjournment filed. Therefore, we were of the filed. Therefore, we were of the opinion that assessee was not interested in prosecuting the appeal opinion that assessee was not interested in prosecuting the appeal opinion that assessee was not interested in prosecuting the appeal and therefore, same and therefore, same was heard ex-parte qua the assessee qua the assessee after hearing arguments of the Ld. Departmental Representative (DR) and hearing arguments of the Ld. Departmental Representative (DR) and hearing arguments of the Ld. Departmental Representative (DR) and perusal of the material available on record material available on record.
The Ld. DR submitted that issue in dispute involved is The Ld. DR submitted that issue in dispute involved is The Ld. DR submitted that issue in dispute involved is identical to the issue raised in identical to the issue raised in appeals having and and 2349/Mum/2024 for assessment year 2013 for assessment year 2013-14 and 2014 14 and 2014-15, which were heard on 09.07.2024. We find that in those appeals, the issue were heard on 09.07.2024. We find that in those appeals, the issue were heard on 09.07.2024. We find that in those appeals, the issue has been restored to the file of the AO restored to the file of the AO by the Co-ordinate Bench ordinate Bench , observing as under:
7.3 Thus, for deduction of interest u/s 36(1)(iii) of the Act, firstly, Thus, for deduction of interest u/s 36(1)(iii) of t Thus, for deduction of interest u/s 36(1)(iii) of t the condition should be satisfied that borrowed fund on which the condition should be satisfied that borrowed fund on which the condition should be satisfied that borrowed fund on which interest is claimed are utilised for the purpose of business of the interest is claimed are utilised for the purpose of business of the interest is claimed are utilised for the purpose of business of the assessee, , secondly, if such funds have been advanced to sister assessee, , secondly, if such funds have been advanced to sister assessee, , secondly, if such funds have been advanced to sister concern interest free , then assessee shoul concern interest free , then assessee should show that same were d show that same were advanced for commercial expediency. The Hon’ble Delhi High Court in advanced for commercial expediency. The Hon’ble Delhi High Court in advanced for commercial expediency. The Hon’ble Delhi High Court in the case of CIT v. Dalmia Cement (Bharat) Ltd. [2001] 69 CCH CIT v. Dalmia Cement (Bharat) Ltd. [2001] 69 CCH CIT v. Dalmia Cement (Bharat) Ltd. [2001] 69 CCH 0830 (Del HC) 0830 (Del HC) has held that expenditure needs to be incurred for has held that expenditure needs to be incurred for business purpose and reasonableness of t business purpose and reasonableness of the expenditure has to be he expenditure has to be judged from the point of view of the businessman and not from the judged from the point of view of the businessman and not from the judged from the point of view of the businessman and not from the view of the Department. Further, the assessee has relied on before view of the Department. Further, the assessee has relied on before view of the Department. Further, the assessee has relied on before the Ld. CIT(A) on the decision of the Hon’ble Madras High Court in the the Ld. CIT(A) on the decision of the Hon’ble Madras High Court in the the Ld. CIT(A) on the decision of the Hon’ble Madras High Court in the case of CIT v. Padukottai C CIT v. Padukottai Company Pvt. Ltd. 84 ITR 788 (Mad) ompany Pvt. Ltd. 84 ITR 788 (Mad) wherein it is held that once it is accepted that capital was borrowed wherein it is held that once it is accepted that capital was borrowed wherein it is held that once it is accepted that capital was borrowed for the purpose of business, payment of interest on such borrowed for the purpose of business, payment of interest on such borrowed for the purpose of business, payment of interest on such borrowed capital could not be disallowed on the ground that interest charged capital could not be disallowed on the ground that interest charged capital could not be disallowed on the ground that interest charged on lending was at on lending was at lower rate than interest paid on borrowing and lower rate than interest paid on borrowing and that lending was in favour of the persons who were connected with that lending was in favour of the persons who were connected with that lending was in favour of the persons who were connected with the assessee. the assessee. 7.4 In view of the above, for deduction of interest on borrowed In view of the above, for deduction of interest on borrowed In view of the above, for deduction of interest on borrowed capital, onus lies on the assessee to demonstrate whether the capital, onus lies on the assessee to demonstrate whether the capital, onus lies on the assessee to demonstrate whether the borrowed funds have been utilized for the purpose of the business or rrowed funds have been utilized for the purpose of the business or rrowed funds have been utilized for the purpose of the business or commercial expediency. In the instant case the issue in dispute commercial expediency. In the instant case the issue in dispute commercial expediency. In the instant case the issue in dispute whether loans advanced, may be at the lower rate of the interest or whether loans advanced, may be at the lower rate of the interest or whether loans advanced, may be at the lower rate of the interest or without charging any interest, but those loans have been without charging any interest, but those loans have been without charging any interest, but those loans have been advanced for the purpose of the business of the assessee or not. The assessee for the purpose of the business of the assessee or not. The assessee for the purpose of the business of the assessee or not. The assessee has suo-motu made disallowance of Rs.7,70,05,688/ motu made disallowance of Rs.7,70,05,688/ motu made disallowance of Rs.7,70,05,688/- but it has not filed detailed justification of calculation of such disallowance. On filed detailed justification of calculation of such disallowance. On filed detailed justification of calculation of such disallowance. On perusal of the above table of suo perusal of the above table of suo-motu disallowance, we find that isallowance, we find that assessee assessee assessee has has has mainly mainly mainly worked worked worked out out out interest interest interest disallowance disallowance disallowance on on on outstanding balance of parties at the year end. The assessee has not outstanding balance of parties at the year end. The assessee has not outstanding balance of parties at the year end. The assessee has not specified on what rate it has worked out the notional disallowance. specified on what rate it has worked out the notional disallowance. specified on what rate it has worked out the notional disallowance. Once, the assessee has suo Once, the assessee has suo-moto made disallowance then, it is disallowance then, it is established that those loans were not deployed for business purpose established that those loans were not deployed for business purpose established that those loans were not deployed for business purpose and the corresponding interest therefore need to be disallowed and the corresponding interest therefore need to be disallowed and the corresponding interest therefore need to be disallowed invoking section 36(1)(iii) of the Act. The only issue thus left is invoking section 36(1)(iii) of the Act. The only issue thus left is invoking section 36(1)(iii) of the Act. The only issue thus left is examining the correctness of the examining the correctness of the calculation of the suo calculation of the suo-motu disallowance made by the assessee. Since, no such rational analysis disallowance made by the assessee. Since, no such rational analysis disallowance made by the assessee. Since, no such rational analysis has been done either by the Assessing Officer or by the assessee and has been done either by the Assessing Officer or by the assessee and has been done either by the Assessing Officer or by the assessee and therefore, we feel it appropriate to restore this issue back to the file of therefore, we feel it appropriate to restore this issue back to the file of therefore, we feel it appropriate to restore this issue back to the file of the Assessing the Assessing Officer for identifying the borrowed funds which have Officer for identifying the borrowed funds which have been deployed towards the loans or advances which are not for the been deployed towards the loans or advances which are not for the been deployed towards the loans or advances which are not for the purpose of business or for the commercial expediency and the purpose of business or for the commercial expediency and the purpose of business or for the commercial expediency and the corresponding interest on the borrowed funds is liable to be corresponding interest on the borrowed funds is liable to be corresponding interest on the borrowed funds is liable to be disallowed, ne disallowed, need to calculated on the basis of number of days those ed to calculated on the basis of number of days those funds remained advanced for non business purpose. In view of the funds remained advanced for non business purpose. In view of the funds remained advanced for non business purpose. In view of the discussion, we feel it appropriate to restore this issue back to the file discussion, we feel it appropriate to restore this issue back to the file discussion, we feel it appropriate to restore this issue back to the file of the Assessing Officer for deciding afresh. of the Assessing Officer for deciding afresh. 5.1 Respectfully, following our finding in the preceding assessment following our finding in the preceding assessment following our finding in the preceding assessment years in the case of the assessee years in the case of the assessee, the finding of ld CIT(A) on the the finding of ld CIT(A) on the issue in dispute is set issue in dispute is set-aside and the sole ground of the appeal of the the sole ground of the appeal of the Revenue is restored back to the file of the AO for deciding afre restored back to the file of the AO for deciding afresh. restored back to the file of the AO for deciding afre The ground is accordingly The ground is accordingly allowed for statistical purposes. allowed for statistical purposes.
In the result, the appeal of the Revenue is allowed for In the result, the appeal of the Revenue is allowed for In the result, the appeal of the Revenue is allowed for statistical purposes.