2019 (7) TMI 1708 - AT - Income Tax

Disallowance u/s 36(1)(iii) interest paid on loan - Interest on loans taken from director wholly and exclusively for the purpose of business activities - HELD THAT - Dichotomy between the borrowing of the loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself, bring any new asset of an enduring nature into existence, and that it is the transaction of investment of the borrowed capital for the purchase of a new asset which brings that asset into existence; the transaction of borrowing is not the same as the transaction of investment and if this dichotomy is kept in mind, it becomes clear that the transaction of borrowing attracts the provisions of section 36(1)(iii). Assessee filed before the AO the confirmation of loan from the directors in response to the written query dated 29.09.2014 issued by the AO u/s 142(1) - Assessee-company had effected purchase of land in the first year of operation i.e. from 07.05.2010 to 31.03.2011 for an amount which was financed out of unsecured loan obtained from the directors amounting outstanding as at 31.03.2011. Interest was paid on the above loan @ 10%. The borrowing had been effected for the purpose of business activities of the company. The assessee has rightly claimed u/s 36(1)(iii) interest paid on the above loan during the impugned assessment year - Decided in favour of assessee.

Summary

Issues:
Appeal against disallowance of interest on loans taken from directors for business activities.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax-24, Mumbai, regarding the disallowance of interest on loans taken from directors for business activities under section 143(3) of the Income Tax Act, 1961.
2. The assessee contended that the interest paid on loans was wholly and exclusively for business purposes, citing relevant legal precedents and decisions supporting the deduction under section 36(1)(iii) of the Act.
3. The Assessing Officer disallowed the interest expenditure, stating that the assessee failed to provide sufficient explanation and that it was the first year of operation for the company.
4. The Commissioner of Income Tax (Appeals) upheld the disallowance, noting that the company had only purchased land without engaging in any business activities like development or sale of the land during the relevant year.
5. During the appeal, the assessee presented audited accounts and legal decisions to support their claim that the borrowing was for business purposes and should be allowed as a deduction.
6. The Tribunal analyzed the case law presented by the assessee, emphasizing that borrowing costs for business purposes are deductible under section 36(1)(iii) irrespective of whether the capital is used for revenue or capital assets.
7. Considering the purpose of the borrowing and the commencement of business activities, the Tribunal found in favor of the assessee, deleting the addition of the disallowed interest amount.

This detailed analysis of the judgment highlights the legal arguments, precedents, and reasoning behind the decision to allow the appeal and delete the disallowed interest amount.