2014 (1) TMI 1275 - AT - Income Tax

Disallowance of interest reduced u/s 36(1)(iii) of the Act Held that - There was no occasion to hold that the assessee is inflated the cost of project by Rs.25 lakhs or charging less interest from the sister concern at the rate of 14%, against 15% interest paid by the assessee the amount of Rs.2 crores was directly paid to M/s Vestas RRB (I) Pvt. Ltd. by the bank thus, there is no question of doubting that the same was not for the purpose of business - the entire interest paid by the assessee was for commercial purposes the disallowance set aside Decided in favour of Assessee and against Revenue. Loan amount Held that - The assessee indulged in financial business and almost the entire loan has been utilized for repayment of other creditors, which was on account of business expediency - The CIT(A) has noted that the repayment of loan was not for business purpose, however, nothing has been brought on record, how the same was not for the business purpose - the case of the assessee required to be considered in right perspective - The loan was not utilized somewhere else other than the business purpose - it cannot be said that the same was not for the business purpose. Disallowance of interest Held that - The AO has disallowed for the reason that the funds were utilized for non-business purpose - The CIT(A) has not given any finding on this issue - this amount is also allowable for the reason that the loan was taken from the shareholders in earlier years and interest paid in earlier year was not disallowed - there was no reason to disallow the interest on the amount of loan taken from the shareholders paid during the year the addition made deleted Decided partly in favour of Assessee.

Summary

Issues:
Cross appeals by assessee and department against CIT(A) order for AY 2003-04.

Analysis:
1. Interest Disallowance under Section 36(1)(iii):
- Department objected to reduction of interest disallowance to Rs.14,92,123 by CIT(A).
- Assessee objected to remaining addition of Rs.20,90,752 made by AO.
- AO initially disallowed entire interest expenditure of Rs.22,55,640 alleging diversion of loans to group companies.
- CIT(A) allowed deduction except for Rs.10 lakh loan used for purchasing shares.
- Tribunal directed AO to reconsider and link all interest income.
- AO disallowed Rs.20,90,752 as loans were diverted to interest-free advances.

2. Assessee's Appeal - Loans Utilization:
- CIT(A) allowed deduction for interest on Rs.2 crores loan for Windmill investment.
- Disallowed Rs.1,44,645 out of total interest paid to Allahabad Bank.
- Disallowed entire interest of Rs.4,53,984 paid to Satara Sahakari Bank Limited.
- Tribunal found Rs.2 crores loan was utilized for business purpose and deleted disallowance.
- Tribunal also deleted disallowance of Rs.4,53,984 except for interest on Rs.10 lakh investment in shares.
- Disallowed interest of Rs.1,87,313 by AO was deleted as it was paid to shareholders for business purpose.

3. Judgment and Conclusion:
- Tribunal dismissed department's appeal and allowed assessee's appeal in part.
- Held that interest paid by assessee was for commercial purposes.
- Deleted disallowances on loans utilized for business purposes.
- Disallowed interest by AO on funds used for non-business purpose was deleted.
- Overall, the appeals were decided in favor of the assessee, allowing deductions based on loan utilization for business activities.
- The judgment was pronounced on July 24, 2013, by the ITAT Mumbai.

This detailed analysis covers the key issues raised in the cross-appeals, the reasoning behind the disallowances, and the Tribunal's decision on each issue, ensuring a comprehensive understanding of the legal judgment.