2014 (9) TMI 397 - HC - Income Tax

Unsecured loan from friends and relatives Loans utilized for business purpose or not Held that - The assessee has borrowed funds from his friends and relatives and paid the interest thereupon - The funds were borrowed for the purpose of business but were never utilized for the purpose of business - The funds were lying idle in an almirah - It is not case of assessee that the funds were Cash in hand , as per the balance-sheet - the funds was not shown as cash in hand - No special circumstances were mentioned for not utilizing the funds for business purpose there is no reason to interfere in the order of the Tribunal Decided against assessee.

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal was justified in reversing the order of the Commissioner of Income Tax?
2. Whether the interest paid on borrowed funds can be allowed as a deduction under Section 36(1) of the Income Tax Act, 1961?

Analysis:
1. The appeal was filed against the order of the Income Tax Appellate Tribunal, which reversed the Commissioner of Income Tax's order. The Tribunal questioned the utilization of borrowed funds by the assessee for business purposes. The Tribunal's decision was based on the lack of material to draw inferences regarding cash flow statements, which the assessee failed to provide. The Tribunal's reasoning differed from that of the Assessing Officer, leading to the appeal challenging the Tribunal's decision.

2. The assessee, engaged in trading activities, borrowed unsecured funds in previous years and paid interest during the assessment year. The Assessing Officer disallowed the interest payment deduction as the borrowed funds were not utilized for business purposes but remained idle. The first appellate authority overturned this disallowance, but the Tribunal reinstated the Assessing Officer's decision. The assessee argued that all conditions under Section 36(1) of the Income Tax Act were met for interest deduction and cited relevant case laws to support the claim. The department contended that since the funds were not used for business, no deduction should be allowed, referring to a specific case law defining business purposes.

In the judgment, it was noted that the borrowed funds were indeed intended for business but remained idle in an almirah without being utilized for business activities. The funds were not categorized as "cash in hand" in the balance sheet, and no valid reasons were provided for not using the funds for business purposes. Consequently, the court upheld the Tribunal's decision, ruling in favor of the department and against the assessee. The appeal was dismissed, and an interim order was vacated.