2020 (5) TMI 674 - AT - Income Tax

Disallowance of Interest on Working Capital - CIT (A) Restricted the disallowance on account of interest to 50% - HELD THAT - As brought to our notice that the similar issue stands covered against the revenue in the earlier year in 2018 (2) TMI 2027 - ITAT DELHI for the assessment year 2009-10. Hence, the appeal of the revenue is hereby dismissed. Matter referred to the file Assessing Officer for verification of the utilization of the loan for business purpose by taking into account the amount of the loan raised - The quantum of the own capital and the reserves surplus, utilization of the amount for day-to-day running of the business and utilization of the amount for investment in the equity shares of the subsidiary company or the amount invested for infusion of the capital in any other company. The AO may then take a considered decision with regard to disallowance of interest on loan and bank charges in accordance with the provisions of the Income Tax Act.

Summary

Issues Involved:
- Disallowance of Interest on Working Capital
- Disallowance of Bank Charges

Analysis:

Issue 1: Disallowance of Interest on Working Capital
The AO disallowed interest on working capital claimed by the assessee, amounting to ?4,70,59,275, as non-business expenditure under section 37 of the Act. The AO's decision was based on the lack of evidence proving that the expenses were incurred wholly and exclusively for business purposes, especially considering the investment in equity of STPL being equal to the working capital loan. The AO treated the entire loan amount as an investment in equity. The assessee argued before the ld. CIT (A) that the working capital loan was utilized for daily business expenses and that the interest claimed should be allowed as business expenditure. However, the ld. CIT (A) held that a significant portion of the loan amount was used for investing in equity funds, which could not be considered wholly and exclusively for business purposes. Therefore, the disallowance was restricted to 50% of the interest claimed. The Tribunal dismissed the revenue's appeal, citing a similar precedent from an earlier year.

Issue 2: Disallowance of Bank Charges
During the relevant year, the assessee claimed bank charges of ?58,46,006, of which 50% amounting to ?29,23,003 was disallowed by the AO. The reason for disallowance was the failure to prove that these expenses were incurred wholly and exclusively for business purposes. The ld. CIT (A) upheld the disallowance of 50% of the bank charges. The assessee contended that the bank charges represented legitimate business expenditure and should be fully allowable under section 37(1) of the Act. The Tribunal directed the Assessing Officer to verify the utilization of the loan for business purposes, considering various factors such as the loan amount, own capital, reserves & surplus, and investments in equity shares. The AO was instructed to make a decision on the disallowance of interest on the loan and bank charges in accordance with the provisions of the Income Tax Act. Consequently, the appeals of the revenue were dismissed, and the Cross Objections of the assessee were allowed for statistical purposes.

In conclusion, the judgment addressed the issues of disallowance of interest on working capital and bank charges, emphasizing the necessity of proving expenses were incurred wholly and exclusively for business purposes to claim them as allowable deductions under the Income Tax Act. The Tribunal's decision highlighted the importance of evidence and documentation to support such claims, ultimately leading to the dismissal of the revenue's appeals and the allowance of the assessee's Cross Objections for statistical purposes.