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2015 (9) TMI 431 - AT - Income TaxDisallowance of interest expenses - assessee has allegedly diverted interest bearing funds for non-business purposes - Held that - The advances have been made to M/s Suresh Goel & Son (HUF) for the purpose of the business and on account of commercial expediency, and it has not been established by the learned Assessing Officer that advances are for non - business purposes and as such, disallowance made by the learned Assessing Officer is unsustainable in law. Therefore, delete the addition in dispute amounting to ₹ 10,54,790/- made by the AO and upheld by the Ld. CIT(A). See S.A. Builders Ltd. vs. CIT 2006 (12) TMI 82 - SUPREME COURT - Decided in favour of assessee.
Issues Involved:
1. Disallowance of interest expenses due to alleged diversion of interest-bearing funds for non-business purposes. 2. Evaluation of commercial expediency in the use of interest-bearing funds. 3. Procedural fairness in the assessment and appellate proceedings. Detailed Analysis: 1. Disallowance of Interest Expenses: The primary issue in this case revolves around the disallowance of Rs. 10,54,790/- out of the total interest expenses of Rs. 21,81,286/- on the grounds that the assessee allegedly diverted interest-bearing funds for non-business purposes. The Assessing Officer (AO) observed that the assessee paid interest on secured loans but had also given an interest-free loan to one of its partners, M/s Suresh Goel & Sons HUF, which was not for business purposes. Consequently, the AO disallowed a proportionate amount of interest expenses under section 36(1)(iii) of the Income-tax Act, 1961. 2. Evaluation of Commercial Expediency: The assessee contended that the funds advanced to M/s Suresh Goel & Sons HUF were for constructing a building on a plot owned by the partners, which was intended for business use. However, the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] did not find this explanation satisfactory. The CIT(A) upheld the AO's decision, stating that the building was cleared as a residential building and only 25% was proposed for business use, which was factually incorrect according to the assessee. The tribunal examined whether the diversion of interest-bearing loans to interest-free loans was for commercial expediency. The tribunal found that the assessee had been conducting its business from an agricultural property owned by the partners without paying rent. The funds were advanced for constructing a building to be used for business purposes, which aligns with commercial expediency. The tribunal cited the Supreme Court's judgment in S.A. Builders Ltd. vs. CIT, which supports the deduction of interest on borrowed loans if the funds are used for business purposes or commercial expediency. 3. Procedural Fairness: The assessee argued that both the AO and CIT(A) disregarded the documentary evidence and submissions without conducting any inquiry or investigation. The tribunal noted that the lower authorities failed to appreciate the commercial expediency of the expenditure incurred. The tribunal emphasized that the only condition for claiming deduction under section 36(1)(iii) is the commercial expediency of the expenditure, and once this condition is fulfilled, no further factors should deny the legitimate claim of deduction. The tribunal also referenced the judgments of the Hon'ble High Court of Madras in CIT vs. Century Flour Mills Ltd and the ITAT Chandigarh in Dhanna Mal Chatter Sain vs. ITO, which support the assessee's position that the advances were made for business purposes and the onus was on the Revenue to prove otherwise. Conclusion: The tribunal concluded that the advances made to M/s Suresh Goel & Sons HUF were for business purposes and commercial expediency. The disallowance made by the AO and upheld by the CIT(A) was deemed unsustainable in law. Therefore, the tribunal deleted the addition of Rs. 10,54,790/- and allowed the appeal of the assessee. Order Pronouncement: The appeal of the assessee was allowed, and the order was pronounced in the Open Court on 8.7.2015.
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