2016 (8) TMI 604 - AT - Income Tax

Allowability of interest expenditure incurred on amount of borrowings from the Union bank of India - Held that - Satisfaction of the first conditions viz., whether incurred wholly and exclusively for the purpose of earning income has to be examined in the light of the facts surrounding the present case. According to the assessee-company, money was borrowed from Union bank of India only for the purpose of purchasing the land from its sister concern viz., PEP for its business purpose. Therefore, borrowings were made only for the purpose of business. Therefore, it is clear that the borrowings were not made for the purpose of earning interest income in the form of loans advanced to directors of the company. The Hon ble Supreme Court in the case of Vijay Laxmi Sugar Mills Ltd. Vs. CIT (1991 (8) TMI 1 - SUPREME Court ) had laid down that for allowance of an expenditure under the provisions of sec.57(iii), the expenditure should have been incurred for the purpose of earning such income. The Hon ble Supreme Court also explained that the expenditure should have been incurred for the purpose of making or earning such income shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. In the light of legal provisions, the claim cannot be allowed under the provisions of sec.57(iii) of the Act. It is not only the excess of expenditure but entire interest expenditure incurred on borrowings made from Union bank of India is not allowable. Considering alternative submissions that interest expenditure should be allowed as deduction u/s 36(1)(iii) of the Act. One of the requirements for allowance of interest paid on capital borrowed is that the amount should be borrowed for the purpose of business. It is no doubt that the law is quite settled to the extent that the taxing authorities cannot question the necessity of the borrowing but the onus lies on the assessee to prove that the borrowings have been made for the purpose of business. The contention of the assessee that the borrowings were made for the purpose of purchasing land for its business purpose from its sister concern i.e. PEP was disbelieved by the AO. The fact that the payments were made to sister concern and the amounts were advanced even before verification of the title deeds of the assessee-company raises eye-brows about veracity of the claim. The assessee-company had failed to controvert the suspicion entertained by the AO with evidence. Therefore, assessee had failed to discharge the onus of proving that the borrowings were made only for business purpose. Therefore, the claim cannot even be allowed as a deduction u/s 36(1)(iii) of the Act. We make it clear that this deduction is not allowable not only in respect of excess of interest over the interest expenditure but also the entire interest expenditure incurred on the borrowings made from Union bank of India, as it forms part of the same subject matter of appeal. - Decided against assessee

Summary

Issues Involved:
1. Legality of the CIT(A)'s unsigned order.
2. Disallowance of ?81,95,426/- by the AO.
3. Levy of interest under section 234B of the Act.

Issue-wise Detailed Analysis:

1. Legality of the CIT(A)'s unsigned order:
The assessee contended that the order passed by the CIT(A) was unsigned, thereby rendering it "bad in law and liable to be quashed." However, this issue was not elaborated upon in the judgment, and the primary focus remained on the substantive issues of disallowance and interest levy.

2. Disallowance of ?81,95,426/- by the AO:
The core issue was the disallowance of ?81,95,426/- by the AO, which was confirmed by the CIT(A). The AO disallowed this amount on the grounds that the interest-bearing funds were diverted for non-business purposes. The assessee had borrowed funds from Union Bank of India and advanced ?33.50 crores to M/s Prestige Estate Projects Pvt. Ltd. (PEPPL) as an advance for purchasing property. However, the transaction did not materialize, and the amount was returned.

The AO and CIT(A) both concluded that the transaction was a facade to cover up interest-free loans given to PEPPL, a shareholder with a substantial interest in the assessee company. The AO noted that the assessee failed to provide a formal agreement and relied on correspondence that appeared to be an afterthought. The CIT(A) agreed with the AO, stating that the advance was given without interest to PEPPL, indicating a diversion of funds for non-business purposes.

The assessee argued that the borrowed funds were eventually utilized for lending to shareholders at a higher interest rate than the bank's rate, and the loss was due to a timing difference. However, the Tribunal found that the borrowings were not made for the purpose of earning interest income, thus disallowing the claim under section 57(iii) of the Act. The Tribunal also rejected the alternative claim under section 36(1)(iii), as the assessee failed to prove that the borrowings were made for business purposes.

3. Levy of interest under section 234B of the Act:
The assessee contended that the interest levied under section 234B was not applicable. However, the Tribunal did not provide a detailed discussion on this issue, as the primary focus was on the disallowance of the interest expenditure.

Conclusion:
The Tribunal dismissed the appeal, upholding the disallowance of ?81,95,426/- and rejecting the claims under sections 57(iii) and 36(1)(iii) of the Act. The order pronounced on 24th June 2016 confirmed the findings of the lower authorities, emphasizing that the borrowings were not for business purposes and the transaction with PEPPL was a sham.