2015 (4) TMI 1334 - AT - Income Tax

Disallowance of interest as per proviso to sec. 36(1)(iii) - HELD THAT - A bare perusal of the proviso to section 36(1)(iii) clearly reveals that there should be specific finding that the amount of interest paid is in respect of capital borrowed for acquisition of an asset for extension of existing business or profession. Therefore, direct nexus between the capital borrowed and the acquisition of asset has to be established before proviso can be invoked. In the present case the AO has not established this nexus. The proviso was wrongly invoked by him. Further, we find that it was specifically stated before the AO that there was introduction of fresh capital on which no claim of any interest had been made in the books. AO has not at all taken into consideration as to how this fund was utilized. Further, assessee has also pointed out that it had received interest free loan, which has been reproduced earlier. In any case, the assessee s claim was that the entire borrowed funds had been utilized for business purposes and not for acquisition of fixed assets. In view of above discussion, we do not find any reason to interfere with the order of ld. CIT(A) and the same is upheld.

Summary

Issues:
1. Disallowance of interest under proviso to sec. 36(1)(iii) of the I.T. Act.

Detailed Analysis:
The appeal before the Appellate Tribunal ITAT Delhi pertained to the disallowance of interest under the proviso to section 36(1)(iii) of the Income Tax Act. The assessee had claimed expenses on interest payments totaling to &8377; 23,02,280/- in the relevant assessment year. The Assessing Officer (AO) disallowed &8377; 22,10,351/- as interest under the proviso to section 36(1)(iii) since the asset for which the borrowed capital was utilized was not put to use. The AO observed an increase in fixed assets and unsecured loans in the balance sheet and concluded that borrowed funds were used for acquiring assets for business expansion.

The assessee contended that the investments in certain properties were made from non-interest bearing funds. Even if interest-bearing funds were used for these investments, the assessee argued that only a partial disallowance of &8377; 2,98,893/- should be made. The ld. CIT(A) deleted the disallowance, stating that the AO failed to establish the nexus between the interest-bearing funds and non-business purposes. The ld. CIT(A) also emphasized that interest paid on loans for investments in assets for business purposes should be allowed as a business expenditure, even if those assets do not yield immediate income.

The revenue appealed against the CIT(A)'s decision. The Tribunal analyzed section 36(1)(iii) and noted that a direct nexus between the borrowed capital and the acquisition of assets for business expansion must be established before invoking the proviso. The Tribunal found that the AO did not establish this nexus and did not consider the fresh capital introduced by the assessee. The Tribunal upheld the CIT(A)'s decision, stating that the borrowed funds were utilized for business purposes and not solely for acquiring fixed assets.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision. The order was pronounced on 24-04-2015.