2013 (12) TMI 1003 - AT - Income Tax

Interest paid on deposits Held that - The taxpayer received deposit outside the books of account and paid interest - Following assessee s own case for the assessment year 2008-09 - The taxpayer borrowed funds for enhancing the working capital for the purpose of money lending business - Interest on capital borrowed for the purpose of business falls within the provisions of section 36(1)(iii) - Any interest paid on the capital borrowed for the purpose of business or profession has to be allowed as deduction u/s 36(1)(iii) - Provisions of section 37(1) are not applicable in respect of interest on the capital borrowed for business purpose As per provisions of it can be inferred that the intent of legislature is to disallow the payment like protection money, extortion, hafta, bribe, etrc. when it was claimed as business expenditure - It is immaterial whether the money was borrowed in personal capacity or not Decided against Revenue.

Summary

Issues:
Disallowance of interest paid on deposit outside the books of account.

Analysis:
1. The appeal concerns the disallowance of interest paid on a deposit outside the books of account for the assessment year 2009-10. The Revenue argues that the taxpayer accepted the deposit in violation of RBI Act provisions and paid interest, leading to disallowance. The Revenue cites the Karnataka High Court and Bombay High Court judgments to support the disallowance based on money circulation schemes.

2. The taxpayer, engaged in money lending business, borrowed money in an individual capacity, not in the business name. The taxpayer's senior counsel argues that the interest paid on the borrowed capital falls under section 36(1)(iii) of the Act and is not prohibited by law. The taxpayer maintained records of depositors and interest payments, claiming the interest as part of net income.

3. Section 37(1) of the Income-tax Act allows expenditure for business purposes, excluding capital or personal expenses. The Explanation to section 37(1) disallows expenditure for illegal purposes. The CBDT clarified that unlawful payments like protection money, extortion, etc., are not deductible. The Tribunal finds that interest on capital borrowed for business falls under section 36(1)(iii) and is allowable, not subject to section 37(1).

4. Previous Tribunal decisions and case law analysis establish that interest on capital borrowed for business purposes is deductible under section 36(1)(iii) and not subject to Explanation to section 37(1). The Tribunal confirms the CIT(A)'s decision based on consistent reasoning from previous assessments.

5. The Tribunal dismisses the cross objection filed by the taxpayer, supporting the CIT(A)'s decision. Both the Revenue's appeal and the taxpayer's cross objection are rejected, affirming the CIT(A)'s order. The judgment upholds the allowance of interest paid on capital borrowed for business purposes, in line with statutory provisions and legal precedents.

This detailed analysis of the judgment highlights the arguments presented by both parties, the legal provisions considered, and the Tribunal's decision based on the interpretation of relevant tax laws and precedents.