2019 (2) TMI 1862 - AT - Income Tax

Disallowance u/s 36(1)(iii) - interest on borrowed capital on the ground of diversion of borrowed funds - Addition holding non business purpose - HELD THAT - perused the joint development agreement entered between appellant and the said M/s. TIPL, wherein we do not find any stipulation that appellant has to pay interest free advances to the said company. Furthermore, the said joint development agreement is not a registered document. It is also a matter of record that the said payment was treated as a deemed dividend in the hands of M/s. TIPL. However, the contention of the ld. Counsel that it result in double taxation in the hands of both cannot be accepted, as in the present case, what was disallowed was only the interest claim. Thus, the appellant had failed to establish the business expediency in advancing the money to the holding company. The onus always will be on the assessee to satisfy the AO that the loans raised by the appellant were used for its business purpose. Failure to discharge his onus would result into the disallowance of interest claim as held by the Hon ble Punjab Haryana High Court in the case of Abhishek Industries 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT - Decided against assessee.

Summary

Issues:
Appeal against disallowance of interest on borrowed capital u/s 36(1)(iii) for AY 2009-10.

Analysis:
The appeal was filed against the order of the CIT(A) sustaining the disallowance of interest on borrowed capital under section 36(1)(iii) of the Act. The appellant contended that the disallowance was contrary to law, facts, and circumstances of the case. The appellant argued that there was no diversion of borrowed funds for non-business purposes and that the transaction with M/s Thiruvengadam Investments was for commercial consideration. However, the AO disallowed the interest claiming lack of business expediency and necessity to pay money to M/s Thiruvengadam Investments. The CIT(A) confirmed the addition, stating that the appellant failed to explain any commercial expediency for the interest-free loan. The appellant's argument that the loans were advanced during the normal course of business and as per a joint development agreement was rejected. The Tribunal noted that the joint development agreement did not stipulate interest-free advances and was not a registered document. The contention of double taxation was dismissed, and it was held that the appellant failed to establish business expediency in advancing money to the holding company. The onus was on the appellant to prove that the loans were used for business purposes, as per legal precedents. The Tribunal upheld the CIT(A)'s decision, stating that the appellant failed to discharge the onus of proving the loans were used solely for business purposes, and the decision of the Supreme Court in a similar case could not be applied. Consequently, the appeal was dismissed.

This case involved a dispute regarding the disallowance of interest on borrowed capital under section 36(1)(iii) for the assessment year 2009-10. The appellant company contended that the disallowance was unjustified and erroneous, emphasizing that there was no diversion of borrowed funds for non-business purposes. The AO had disallowed the interest, citing lack of business expediency and necessity to pay money to M/s Thiruvengadam Investments. The CIT(A) upheld the disallowance, stating that the appellant failed to provide a commercial rationale for the interest-free loan. The appellant argued that the loans were part of normal business transactions and were in accordance with a joint development agreement. However, the Tribunal found that the agreement did not mention interest-free advances and was not a registered document. The Tribunal emphasized that the appellant had the burden to prove the loans were used for business purposes, as per established legal principles. As the appellant failed to demonstrate business expediency, the Tribunal affirmed the CIT(A)'s decision, concluding that the Supreme Court's precedent cited by the appellant did not apply in this case. Therefore, the appeal was dismissed.