2010 (5) TMI 708 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance made out of interest.
2. Disallowance of interest on borrowed funds diverted for non-business purposes.

Summary:

Issue 1: Deletion of Disallowance Made Out of Interest (I.T.A. No. 2960/Ahd/2004 by Revenue)

The Revenue challenged the deletion of disallowance of Rs. 43,05,000 made out of interest. The Assessing Officer (AO) observed that the assessee had made significant investments in shares of group companies and calculated the funds not utilized for business purposes, leading to the disallowance. The assessee argued that the investments were made in earlier years and were for business purposes, supported by sufficient own funds, and no disallowance was made in previous assessments u/s 143(3). The Commissioner of Income-tax (Appeals) (CIT(A)) found no nexus between borrowed funds and non-business investments, and thus deleted the disallowance. The Tribunal upheld the CIT(A)'s decision, noting the assessee's sufficient own funds and lack of evidence from the AO to prove otherwise. The appeal by the Revenue was dismissed.

Issue 2: Disallowance of Interest on Borrowed Funds Diverted for Non-Business Purposes (I.T.A. No. 2407/Ahd/2005 by Assessee)

The assessee challenged the disallowance of Rs. 21,25,450 out of interest on borrowed funds. The AO disallowed proportionate interest, arguing that borrowed funds were diverted for non-business purposes. The assessee contended that investments in shares were made in earlier years and were supported by sufficient interest-free funds. The CIT(A) confirmed the disallowance but reduced the interest rate applied. The Tribunal found that no new investments were made in the assessment year, and there was no evidence of a nexus between borrowed funds and non-business investments. Following the principle of consistency, the Tribunal deleted the entire disallowance. The appeal by the assessee was allowed.

Cross-Appeals for Assessment Year 2003-04 (I.T.A. No. 163/Ahd/2007 by Assessee and I.T.A. No. 653/Ahd/2007 by Revenue)

Both parties appealed against the CIT(A)'s order for the assessment year 2003-04. The CIT(A) had restricted the disallowance of interest to 9% instead of 15%. The Tribunal noted that the facts were similar to the previous assessment year and followed the same reasoning to delete the entire disallowance. The appeal by the assessee was allowed, and the appeal by the Revenue was dismissed.

Conclusion:

The Tribunal consistently found that the assessee had sufficient own funds to cover investments in shares and that no new investments were made in the relevant assessment years. The AO failed to establish a nexus between borrowed funds and non-business investments. Consequently, the Tribunal upheld the deletion of interest disallowances and dismissed the Revenue's appeals while allowing the assessee's appeals.