2018 (2) TMI 1275 - AT - Income Tax

Disallowance of interest u/s.36(1)(iii) - CIT-A deleted the addition as interest bearing funds were used for non-business purposes - Held that - The finding of CIT(A) that the assessee had sufficient non-interest bearing funds available with it for partners withdrawals, was not controverted by the DR by bringing any cogent and positive material on record. Further, the finding of CIT(A) that the payment of interest was commercially expeditent was examined by the AO in the current and prior years. Therefore, the contentions of AO for diversion of interest bearing borrowed funds to the partners of the sister concern of the assessee cannot be sustained, was also not controverted by the DR by bringing any cogent and positive materials on record. Hence, we do not find any good and justifiable reason to interfere with the order of CIT(A) - Decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Interest under Section 36(1)(iii):

The Revenue appealed against the CIT(A) Raipur's order dated 12.06.2014 for the assessment year 2010-2011, challenging the deletion of disallowance of interest amounting to ?41,54,811/- under Section 36(1)(iii) of the Income Tax Act, 1961. The primary contention was that interest-bearing funds were used for non-business purposes.

Facts of the Case:
The assessee, a partnership firm engaged in printing and publishing, filed its return declaring an income of ?1,85,77,530/-. The AO assessed the total income at ?2,27,32,341/-. During the assessment, the AO noted debit balances in partners' capital accounts and concluded that interest-bearing funds were diverted for non-business purposes. Consequently, the AO disallowed the interest expenditure, relying on several judgments.

Assessee’s Submissions:
The assessee argued that:
- The firm regularly filed returns with audited books.
- No borrowed funds were withdrawn by partners.
- Withdrawals were made from cash profits, not borrowed funds.
- Sufficient interest-free funds were available for withdrawals.
- The AO failed to establish a nexus between borrowings and withdrawals.

CIT(A)’s Observations:
CIT(A) noted that:
- The assessee followed a consistent accounting system where tax payments were debited to the "Advance Tax Payment" account and later transferred to partners' capital accounts.
- No borrowings were made for tax payments, thus no interest expense was claimed.
- Sufficient non-interest-bearing funds were available for partners' withdrawals.
- The AO did not properly marshal the facts and failed to establish a nexus between interest-bearing funds and non-business use.
- The disallowance of interest was unjustified, supported by various judicial precedents.

Tribunal’s Findings:
The Tribunal upheld CIT(A)’s decision, noting:
- The DR could not point out any specific error in CIT(A)’s order.
- The finding that sufficient non-interest-bearing funds were available was not controverted by the DR with any cogent material.
- The payment of interest was commercially expedient, and the AO's contentions were not substantiated with positive materials.

Conclusion:
The Tribunal confirmed CIT(A)’s order, dismissing the Revenue’s appeal. The deletion of disallowance of interest under Section 36(1)(iii) amounting to ?41,54,811/- was upheld, concluding that the assessee had sufficient non-interest-bearing funds and the interest payments were commercially expedient.

Order:
The appeal filed by the Revenue was dismissed, and the order was pronounced in the open court on 15/01/2018.