2013 (5) TMI 193 - AT - Income Tax

Interest u/s 36(1) disallowed - As per the AO The investment in the partnership did not yield any benefit to the assessee, nor any commercial expediency stood explained by him. The partnership firm was in any case a different taxable entity, having its own income, so that the investment therein could not be regarded as the assessee s business, so as to qualify for deduction u/s.36(1)(iii). - Held that - as such, the inference of the assessee as having utilized the borrowed capital for non business purposes, as made by the A.O., is misconceived and incorrect on facts. That being the case, no case for disallowance of any interest, under the facts and circumstances of the given case, is made out. - In favour of assessee.

Summary

Issues involved:
- Maintainability of disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.

Analysis:
The appeal in this case arose from the Commissioner of Income Tax (Appeals)-II, Thane's order allowing the assessee's appeal regarding its assessment for the assessment year 2007-08 under section 143(3) of the Income Tax Act, 1961. The main issue in the appeal was the legality of the disallowance of interest amounting to Rs.17,48,800 by the Assessing Officer under section 36(1)(iii) of the Act. The Assessing Officer observed unsecured loans outstanding in the assessee's balance sheet and a claim for interest on these loans during verification proceedings. Additionally, an investment in a partnership firm was noted, which did not yield any benefit to the assessee, leading to the disallowance of interest. The assessee contended that the investment was made to expand business operations and was sourced from its own capital, not borrowed funds. The Commissioner of Income Tax (Appeals) favored the assessee's argument, resulting in the disallowance being deleted.

Upon hearing both parties and examining the evidence, the Tribunal noted that while an investment may not yield immediate profits, the purpose of the investment is crucial. In this case, the investment in the partnership firm was considered a business investment, but any profits arising from it would be exempt under section 10. Therefore, deduction of interest against such profits was not permissible under section 14A. The Tribunal found no merit in the assessee's claim for interest for the current year based on this argument. However, regarding the assessee's second argument that it had sufficient capital of its own, the Tribunal observed that the balance sheet reflected a substantial capital amount and minimal borrowed funds, indicating that the disallowance of interest was unwarranted. The Tribunal upheld the Commissioner's decision, dismissing the Revenue's appeal.

In conclusion, the Tribunal dismissed the appeal by the Revenue, affirming the decision to delete the disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.