2014 (9) TMI 14 - HC - Income Tax

Deduction on interest on borrowed loans interest free loan given to sister concern - Held that - Assessee borrowed certain amounts from a financial institution and claimed the deduction of interest paid - the conclusion of the AO could have been approved or upheld, if only he was able to demonstrate that what was advanced by the respondent to its sister concern was nothing but the amount borrowed from the financial institution - It is not uncommon that even where an entrepreneur is possessed of resources to establish a business undertaking, borrowing of the amount for that very purpose may prove to be beneficial to him - once it emerges that the AO did not record any finding to the effect that the assessee has borrowed the amount on interest and straight away passed on it to the sister concerned, without levying interest, there was no way he could have disallowed the interest Decided against revenue.

Summary

Issues:
- Deduction of interest on loans borrowed for business purposes
- Disallowance of deduction due to lending to sister concern without charging interest
- Appeal against order of assessment
- Interpretation of Income Tax Act regarding deduction of interest

Analysis:
The respondent, a private limited company assessed to tax, claimed deduction of interest on loans borrowed for business purposes for the assessment years 1992-93. The assessing officer disallowed the deduction citing that the respondent lent substantial amounts to its sister concern without charging interest. The Commissioner of Appeals allowed the appeal, but the Revenue challenged this decision before the Income Tax Appellate Tribunal, which dismissed the appeals leading to the current appeals under Section 260(A) of the Income Tax Act.

The appellant argued that the respondent's lending to its sister concern without charging interest implied that the borrowed amount was not for its business, thus not entitled to claim deduction of interest. On the other hand, the respondent contended that there was no established link between the borrowed amount and the advances to the sister concern, supporting the decisions of the Commissioner and the Tribunal.

The Act allows deduction of interest on loans borrowed for business purposes. The assessing officer's disallowance was based on the assumption that the borrowed amount was diverted to benefit the sister concern. However, for such disallowance to be valid, it must be proven that the funds lent to the sister concern were directly from the borrowed amount, which was not demonstrated in this case.

The law does not prohibit borrowing from one source and lending to another, even if the amounts differ. The assessing officer failed to establish that the borrowed amount was immediately transferred to the sister concern without levying interest. Without such proof, disallowing the interest deduction was unwarranted. As a result, the Tribunal's decision was upheld, and the appeals were dismissed with no costs awarded.