2015 (10) TMI 1491 - AT - Income Tax

Disallowance of interest expenditure under section 36(1)(iii) - AO made disallowance on account of diversion of interest-bearing borrowed funds to group companies - CIT(A) allowed the claim - Held that - Assessee has established that interest-bearing term loan was directly utilised for acquisition of land and meeting the cost of construction. Assessing Officer has failed to establish that the loan amount advanced to sister concerns is out of interest-bearing funds only. The assessee has given the details of the borrowings and utilisation of the same. The assessee has also furnished the details of interest-free funds available with the assessee during the relevant period.A perusal of the same shows that a sum of ₹ 17 crores sanctioned as term loan was directly disbursed by the bank on behalf of the assessee to M/s. Sai Enterprises on different dates for purchase of land. Another sum of ₹ 2,54,00,000 was disbursed by the bank as term loan, that was utilised by the assessee for making payments to M/s. Soorya Developers (Rs.1,48,46,000) and M/s. Meghana Developers (Rs. 1,06,04,000) for development and construction of villas. The assessee has been able to explain utilisation of the entire secured loan of ₹ 20 crores for business purposes. The assessee has also given the details of interest-free funds, amounting to ₹ 82.47 crores. The details of interest-free funds and utilisation of the entire borrowed funds for business of the assessee have not been controverted by the Revenue. As far as, the argument of the Revenue with respect to utilisation of own funds for the repayment of loan instead of advancing to group companies is concerned, we are of the considered opinion that the Revenue should not step into the shoes of the assessee. The Revenue cannot dictate the assessee to conduct its business affairs in a particular manner. As long as the assessee is conducting its business affairs within the legal framework, it is at liberty to manage and utilise its resources according to its own prudence and skill. We find no infirmity in the impugned order. The order of the Commissioner of Income-tax (Appeals) is confirmed and the appeal of the Revenue is dismissed being devoid of merit. - Decided in favour of assessee.

Summary

Issues involved:
- Disallowance under section 36(1)(iii) of the Income-tax Act, 1961 for the assessment year 2009-10.

Detailed Analysis:

Issue 1: Disallowance under section 36(1)(iii) of the Act
- The appeal was filed by the Revenue challenging the Commissioner of Income-tax (Appeals)'s order deleting the disallowance of &8377; 2,17,08,433 made under section 36(1)(iii) of the Income-tax Act, 1961 for the assessment year 2009-10.
- The assessee, a private limited company engaged in real estate and construction, had filed its return of income admitting a loss and offering income under section 115JB of the Act. During scrutiny assessment, the Assessing Officer made additions, including disallowance of interest expenditure under section 36(1)(iii).
- The Commissioner of Income-tax (Appeals) accepted the assessee's submissions and allowed the appeal, prompting the Revenue to appeal to the Tribunal against the findings related to the disallowance under section 36(1)(iii).
- The Revenue argued that the assessee advanced interest-free loans to group companies from interest-bearing funds without showing business expediency, resulting in a diversion of funds. The Revenue contended that the assessee should have reduced its interest burden by repaying the loan instead of advancing funds to group companies.
- The assessee, on the other hand, argued that it had sufficient own funds and there was no diversion of interest-bearing funds. The advances were made to sister concerns for commercial expediency, utilized for land purchase and construction projects.
- The Tribunal, after hearing both sides and reviewing the orders below, noted that the Commissioner of Income-tax (Appeals) had relied on relevant case law and accepted the assessee's claim. It was observed that the interest-bearing term loan was directly used for land acquisition and construction costs, with no proof that the loan to sister concerns came from interest-bearing funds only.
- The Tribunal found that the assessee had explained the borrowings and their utilization, including disbursals for land purchase and villa development. The details of interest-free funds and their utilization for business purposes were provided by the assessee and remained uncontroverted by the Revenue.
- The Tribunal concluded that the Revenue cannot dictate how the assessee manages its business affairs as long as it operates within legal boundaries. The order of the Commissioner of Income-tax (Appeals) was upheld, and the Revenue's appeal was dismissed for lacking merit.

This detailed analysis covers the issues involved in the legal judgment regarding the disallowance under section 36(1)(iii) of the Income-tax Act, 1961 for the assessment year 2009-10.