2015 (4) TMI 103 - HC - Income Tax

Closure of business - disallowance of interest paid for only one year - waiver of interest for the remaining four years as per the settlement - Held that - In the instant case, the borrowed funds were utilized exclusively for the purpose of business and interest was capitalized thereupon and it was the business liability of the assessee to pay the same. The assessee, being the prudent businessman, has entered into settlement to clear the debt by paying the interest only for one year. The remaining interest was waived off by the creditors, so we are of the view that the amount of ₹ 1,22,134/- was paid exclusively for the purpose of business and the same is allowable deduction. The interest paid on the borrowed capital for the purpose of business is deductable under Section 36(1)(iii) as per the ratio laid down in the case of CIT vs. L.G. Balakrishnan & Bros (P.) (1973 (9) TMI 5 - MADRAS High Court ) - Decided in favour of assessee.

Summary

Issues:
Appeal against ITAT order disallowing interest payment deduction for borrowed funds used in business.

Analysis:
The appellant, an assessee firm, appealed against the ITAT order disallowing a deduction for interest payment of Rs. 1,22,134 made to depositors from whom funds were borrowed for business purposes. The AO disallowed the amount as no business was conducted, but the CIT(A) deleted the addition. However, the Tribunal reinstated the AO's decision. The appellant contended that the interest was paid solely for business purposes.

During the assessment year, the appellant had a crushing business that ceased in 1992-93. The borrowed funds were used exclusively for business, and interest was paid only for the year under consideration. The interest was added to the cost of fixed assets, following legal precedents. The appellant settled the debt by paying interest for one year, with the remaining interest waived by creditors.

The Court found that the borrowed funds were utilized for business, and the interest payment was a business liability. The settlement to pay interest for one year indicated prudent business conduct. Relying on legal precedents, the Court allowed the deduction for the interest payment. Consequently, the Tribunal's order was set aside, and the CIT(A)'s decision was restored, granting relief to the assessee.

The appeal was allowed at the admission stage, with no other grounds pressed by the appellant's counsel during arguments. The judgment favored the appellant, recognizing the interest payment as an allowable deduction for business purposes.