2011 (9) TMI 101 - HC - Income Tax

Interest - Loan taken for business or to engage in money landing business - According to the Assessing Officer, loans were not given for the sake of business transactions but simply the loans taken were transferred to the parties by way of loan and the assessee acted as conduit of such loan transactions - Held that - There is no prohibition of taking loan for running a money lending business and an assessee is lawfully entitled to deduct the interest paid on such loan as business expenditure as provided in the Act. - It is not the law that money lending business must be run out of one s own money without taking loan from others or that interest paid on loan for running such business is not allowable as business expenditure - the various transactions of granting and taking loan by the assessee not having been disbelieved and being supported by the profit and loss account of the previous years, the assessment of which had attained finality, the Assessing Officer illegally refused to allow the amount of interest paid by the assessee for various loans taken by him for running the businesses for the relevant assessment year. AO directed to allow entire amount of interest paid by the assessee to his creditors as business expenditure and to treat the amount of interest received by the assessee from his debtors as his income from money lending business subject to the provisions of Section 14A.

Issues Involved:
1. Justification of disallowance of interest expenditure as business expenditure.
2. Consideration of assessee's financial records and previous assessments.

Issue-wise Detailed Analysis:

1. Justification of Disallowance of Interest Expenditure as Business Expenditure:
The core issue was whether the Tribunal was justified in restoring the disallowance of interest expenditure of Rs. 6,03,930 incurred by the assessee for the purpose of his business. The Assessing Officer (AO) disallowed the interest paid by the assessee, arguing that the loans taken were not utilized for business purposes but were merely transferred to other parties. The AO's observations included:
- The assessee acted as a conduit for loan transactions.
- A substantial amount of loans were given to different parties without business transactions.
- Interest debited was not related to business transactions, and part of the loan was used for purchasing shares.

The CIT (Appeals) reversed the AO's decision, stating:
- The loans taken were utilized for the business of share dealings and not for investments.
- The interest was claimed only for business purposes, not for investment in shares.
- The AO misunderstood the distinction between the assessee's two businesses: investment in shares and trading in shares.

The Tribunal, however, restored the AO's order, agreeing with the AO's reasoning that the loans were not utilized for business purposes. The High Court found that the Tribunal overlooked the assessee's money lending business and the fact that the returns for the previous years were accepted, which included the interest as business expenditure.

The High Court concluded that the Tribunal committed a substantial error of law by not considering the money lending business and the previous assessments. The High Court directed the AO to treat the interest paid as business expenditure, subject to the provisions of Section 14A of the Act, which disallows deductions for expenditure related to income not forming part of the total income.

2. Consideration of Assessee's Financial Records and Previous Assessments:
The second issue was whether the Tribunal ignored the assessee's financial records and previous assessments that were considered by the CIT (Appeals). The High Court noted:
- The assessee's financial transactions and records for the previous years were accepted by the AO.
- The CIT (Appeals) considered the entire facts, previous assessments, and the distinction between the assessee's two businesses.
- The Tribunal failed to provide reasons for discarding the CIT (Appeals)' findings and overlooked the money lending business aspect.

The High Court emphasized that the previous assessments, which included the interest as business expenditure, had attained finality and should have been considered. The High Court found the Tribunal's decision arbitrary and unreasonable.

Conclusion:
The High Court set aside the orders of both the CIT (Appeals) and the Tribunal, remanding the matter to the AO to reassess the interest expenditure as business expenditure, subject to Section 14A of the Act. The High Court directed the AO to conclude the assessment within three months. The appeal was allowed, and both issues were answered in the negative and against the Revenue.

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