2016 (6) TMI 484 - AT - Income Tax

Disallowance of claim for deduction being interest expenses - interest bearing funds were utilised for making investment in capital assets - Held that - Undisputedly the fact is that the assessee is the business of Mall cum Multiplex Activities, running of departmental stores, Food Court, retail chain, Cinemas, Club etc. under the name and style of M/s SRS Ltd. The advance given was for the acquisition of a commercial complex to be constructed. The transaction ultimately did not take place and the assessee got back the advances. On these facts and circumstances, we are of the considered view that the advances were given for the purpose of business of the assessee. In our considered view, as advance was given for the purpose of business, no disallowance can be made under section 36(1)(iii) of the Act. - Decided in favour of assessee.

Summary

Issues: Disallowance of interest expenses claimed by the assessee on the ground of utilizing interest-bearing funds for investment in capital assets.

Analysis:
1. The sole issue in this appeal pertains to the disallowance of a claim for deduction of a specific amount as interest expenses by the assessee. The Assessing Officer (A.O.) observed that the assessee had shown an advance for projects to another entity and concluded that borrowed funds were utilized for these advances. The A.O. held that the net liquidity position of the assessee was negative on the date of payment, indicating the utilization of mixed funds for the advances.

2. The First Appellate Authority upheld the A.O.'s findings, citing precedents that disallowed similar claims in the past. The Authority relied on judgments that stated interest on capital borrowed for the extension of the same business is not allowed as a revenue expenditure. The assessee challenged these decisions before the Appellate Tribunal.

3. The Appellate Tribunal analyzed the facts and circumstances of the case, noting that the advances were given for the business purposes of the assessee. Referring to the Income Tax Act, the Tribunal highlighted that deductions for interest paid in respect of borrowed capital for business purposes are allowable. The Tribunal emphasized that no disallowance can be made under section 36(1)(iii) of the Act if the advance was given for business purposes.

4. The Tribunal also pointed out that the A.O. failed to demonstrate how borrowed funds were utilized for the advances, and cited a legal proposition that in cases where interest-bearing and interest-free funds are available, the presumption is that interest-free funds were utilized for interest-free advances. The Tribunal concluded that the assessee had sufficient interest-free funds, and thus, no disallowance could be made on this ground.

5. Additionally, the Tribunal noted that the withdrawal of the appeal in the earlier year due to a small disallowance and the assessee's loss could not act as a precedent. Based on the above analysis, the Tribunal upheld the contentions of the assessee and set aside the order of the First Appellate Authority, allowing the assessee's appeal.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decision based on legal provisions and precedents cited during the proceedings.