2018 (1) TMI 1066 - AT - Income Tax

Disallowance of interest u/s.36(1)(iii) - loan on which the interest was paid was utilized for non business purposes - Held that - Assessee s arguments requires to be rejected considering assessee s failure to discharge the preliminary onus with regard to correctness of the borrowed sum of ₹ 25.50 crores to the Vishwaroop Infotech Pvt. Ltd.. It is an admitted fact that assessee failed to submit evidences by way of said MOU and the Deed of Cancellation. The submission of these papers admittedly happened during the first appeal proceedings. Why these documents could not be submitted by the assessee during the assessment proceedings is a matter of question, still not answered by the assessee even before us. Reasoning of failure of the assessee to discharge the preliminary onus, the claim made by the assessee u/s.36(1)(iii) is dismissed, in principle. Regarding the alternate claim raised by the assessee s counsel before us, it is an admitted fact that assessee did not record any core business activities apart from the interest payments and earnings. The details provided in the financial statements placed at page 15 of the paper book evidences the same. Para 10 of his written submission deals with the arguments raised without prejudice and praying for restricting the disallowance only to ₹ 88,46,924/-, the difference of the interest incurred and interest earned by the assessee. Considering the peculiar facts of this case and subject to verification of the figures by the AO, restricting the disallowance to the said amount of ₹ 88,46,924/- should meet both ends of justice.

Summary

Issues involved:
Disallowance of interest claim under section 36(1)(iii) for non-business purposes.

Detailed Analysis:

Issue 1: Disallowance of Interest Claim
The appeal was filed against the order of CIT(A) confirming the disallowance of interest under section 36(1)(iii) for the Assessment Year 2011-12. The assessee borrowed a sum from Indiabulls for the purchase of land but could not pay the full amount, leading to a Deed of Cancellation with the seller. The Revenue argued that the interest claimed was not for business purposes and that the documents submitted were self-serving and not presented during the assessment proceedings. The Revenue contended that the interest expenditure was not allowable under section 36(1)(iii) as trade advance was not proven by the assessee.

Issue 2: Alternate Claim for Restriction of Disallowance
The assessee argued that the loan amount was used for business purposes and that subsequent events, like forming a partnership with Panchsheel group, supported this claim. The assessee failed to submit the MOU and Deed of Cancellation during the assessment proceedings, raising questions about the delay in providing these documents. The alternate argument was to restrict the disallowance to the difference between interest incurred and earned by the assessee, amounting to ?88,46,924. The Tribunal, after considering the facts and the arguments, restricted the disallowance to this amount, finding it to be just and meeting the ends of justice.

In conclusion, the appeal was partly allowed for statistical purposes, and the disallowance of interest claim was restricted to ?88,46,924 based on the alternate argument presented by the assessee.