2016 (12) TMI 1831 - AT - Income Tax

Disallowance of interest paid on loans - Assessee claimed interest on accrual basis - Right to claim deduction on the basis of earlier assessment - Whether said interest was accrued on the loans borrowed in earlier years and there is no actual payment of this interest to the parties? - as per AO assessee has not shown the parties for which the loans were borrowed and the interest was disallowed - HELD THAT - Assessee has borrowed the amount for the purpose of investment in other firms as capital of the assessee - when the assessee borrowed funds for the purpose of investment in other partner firms, it cannot be allowed as deduction as income earned from firm is not feasible while computing the income of the assessee. This view is fortified by the judgment of Popular Vehicles and Services Ltd. 2009 (10) TMI 574 - KERALA HIGH COURT - in earlier assessment years, there was no assessment u/s.143(3) and the return was accepted only u/s.143(1) of the Act without any scrutiny. It cannot be said that the right is vested with the assessee to claim such deduction on the basis of earlier assessment. Accordingly, the grounds raised by the assessee are dismissed.

Summary

Issues: Disallowance of interest paid on loans.

Analysis:
The appeal before the Appellate Tribunal ITAT Chennai concerned the disallowance of interest paid on loans by the assessee. The assessee claimed an interest amount of ?7,36,579 on accrual basis, which was accrued on loans borrowed in earlier years without actual payment to the parties. The Assessing Officer (AO) disallowed the interest, citing that the assessee did not specify the parties for which the loans were borrowed. The Commissioner of Income-tax(Appeals) upheld this decision, leading the assessee to appeal before the Tribunal.

During the proceedings, it was revealed that the loans were carried forward from previous years, and the interest was allowed in earlier assessment years. However, it was noted that the funds were borrowed for the purpose of investing in other firms as the assessee's capital. The Tribunal opined that when funds are borrowed for investment in other firms, such interest cannot be claimed as a deduction since the income earned from those firms is not relevant in computing the assessee's income.

The Tribunal supported its decision by referring to a judgment of the Kerala High Court in the case of CIT Vs. Popular Vehicles and Services Ltd., [2010] 325 ITR 523(Ker.), emphasizing that the right to claim the deduction based on earlier assessments is not absolute, especially when the income source is different. Notably, the Tribunal highlighted that in previous assessment years, there was no scrutiny under section 143(3) of the Income Tax Act, and the return was accepted under section 143(1) without detailed assessment.

Ultimately, the Tribunal dismissed the grounds raised by the assessee, leading to the dismissal of the appeal. The judgment was pronounced on 22nd December 2016 in Chennai.