2011 (2) TMI 1488 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the order passed by the CIT(A).
2. Justification of the disallowance of interest expenditure.
3. Quantum of the addition disputed by the assessee.

Summary:

Issue 1: Validity of the Order Passed by the CIT(A)
The assessee contended that the order passed by the CIT(A) was contrary to the facts and bad in law. The Tribunal upheld the CIT(A)'s order, confirming the disallowance of interest expenditure but reducing the quantum from Rs. 63,27,541/- to Rs. 25,31,016/-.

Issue 2: Justification of the Disallowance of Interest Expenditure
The AO disallowed interest expenditure on the grounds that borrowed funds were utilized for interest-free advances and acquisition of new assets. The AO noted that the assessee had taken secured loans amounting to Rs. 23.91 crores and paid interest of Rs. 1,37,61,301/-. The funds were used for interest-free advances to M/s Metro Speciality Hospitals Pvt. Ltd and RL Khera Charitable Trust, and for purchasing land. The AO disallowed interest @ 9% on these advances and purchases, totaling Rs. 63,27,541/-. The CIT(A) upheld the disallowance but reduced the quantum to Rs. 25,31,016/- based on a 60:40 ratio of own funds to borrowed funds.

Issue 3: Quantum of the Addition Disputed by the Assessee
The assessee disputed the quantum of the addition. The Tribunal noted that the issue was covered against the assessee by its own case for the assessment year 2005-06. The Tribunal upheld the CIT(A)'s decision, confirming the disallowance of interest expenditure based on the principles laid down in CIT v. Abhishek Industries Ltd, 286 ITR 1 (P & H), which disapproved the nexus theory and required a nexus of use of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii).

Conclusion:
The Tribunal dismissed the appeal filed by the assessee, upholding the CIT(A)'s order and confirming the disallowance of interest expenditure. The decision was based on the principles laid down in CIT v. Abhishek Industries Ltd and the assessee's own case for the previous assessment year. The appeal was dismissed on 28 February 2011.