2011 (9) TMI 601 - HC - Income Tax

Interest bearing borrowals over and above business requirement - AO restircted claim to 50% - Asseesee replied - Securing Dealership investment in shares and credits extended to trade debtors were incidental to the assessee s business debit balance due to business loss - Held That - Order of Tribunal based on the cash flow statement and the balance sheet cannot be taken as materials for proving the claim of the assessee. CIT(A) worked out the non business advances / investments at Rs.13, 56, 937/- Rs.18, 29, 174/- and Rs.18, 94, 723/ there was no materials to establish the nexus of the advances given by the assessee. Further trade credits could not be seen as other than business liabilities and were not free-funds in the sense in which the assessee could use it freely. Appeal of revenue allowed.

Issues:
1. Disallowance of interest on borrowed capital for non-business purposes.
2. Claim for deduction on interest on diverted funds.
3. Investment in shares and credits extended to trade debtors.
4. Assessment of diversion of funds for non-business purposes.
5. Disallowance of interest-bearing borrowals not fully utilized for business purposes.
6. Evaluation of cash flow statement and balance sheet for granting relief.
7. Disallowance of interest payment for non-business purposes.

Issue 1: Disallowance of interest on borrowed capital for non-business purposes
The Revenue appealed against the Income Tax Appellate Tribunal's decision regarding the disallowance of interest on excess borrowed capital not utilized for business purposes. The Tribunal found that the borrowed funds did not entirely match the business assets, leading to a partial disallowance. However, the Tribunal's decision was challenged by the Revenue, arguing that the relief granted was not supported by sufficient evidence of diversion for non-business purposes.

Issue 2: Claim for deduction on interest on diverted funds
The Appellant, engaged in the wholesale business of medicines, claimed a deduction for interest paid while facing assessment proceedings. The Assessing Officer found that a portion of the business funds was diverted for non-business purposes, leading to revised assessments for multiple years. The Commissioner of Income Tax (Appeals) upheld the disallowance of the claim based on the proportion of diverted funds to interest-bearing funds, rejecting the balance. The Appellant contended that the diverted funds were incidental to the business and challenged the disallowance.

Issue 3: Investment in shares and credits extended to trade debtors
Regarding investments in a specific company for securing a dealership, the Commissioner of Income Tax (Appeals) found no evidence linking the investment to the Appellant's business. The Commissioner rejected the argument that the investment aimed to promote the business, emphasizing the diversion of interest-bearing borrowed funds for non-business purposes. The Commissioner directed the reevaluation of funds diverted for non-business purposes related to specific accounts.

Issue 4: Assessment of diversion of funds for non-business purposes
The Commissioner analyzed the Appellant's accounts and investments to determine the extent of non-business advances, emphasizing that a business person would not incur liabilities beyond business requirements. Trade and sundry credits were considered business funds, not free for personal use. The Commissioner concluded that all non-business advances and investments were made using borrowed funds, directing the reassessment of disallowances based on diverted funds.

Issue 5: Disallowance of interest-bearing borrowals not fully utilized for business purposes
The Commissioner noted discrepancies in the utilization of interest-bearing borrowals for business assets, leading to partial disallowances. The Appellant's claim to ignore business losses for assessing diversion of funds was considered, resulting in restricted disallowances based on the claimed losses. The Tribunal's decision to grant relief based on the cash flow statement and balance sheet was challenged by the Revenue for lacking substantial evidence of diversion.

Issue 6: Evaluation of cash flow statement and balance sheet for granting relief
The Tribunal's reliance on the cash flow statement and balance sheet to grant relief was criticized by the Revenue for lacking detailed evidence of diversion for non-business purposes. The Commissioner's analysis of diverted funds and disallowances based on borrowed capital utilization was considered more appropriate than the Tribunal's summary-based decision-making.

Issue 7: Disallowance of interest payment for non-business purposes
Given the absence of fresh borrowings and the utilization of old loans, the Commissioner's approach of restricting disallowances based on diverted funds was deemed suitable. The Tribunal's decision to grant relief without thorough evidence of diversion for non-business purposes was overturned, restoring the Commissioner's disallowances for all relevant years.

In conclusion, the High Court set aside the Tribunal's order and upheld the Commissioner of Income Tax (Appeals) decisions for all years, emphasizing the need for substantial evidence to support claims of diversion of funds for non-business purposes.

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