2019 (2) TMI 1321 - AT - Income Tax

Disallowance of interest paid on loans - interest bearing funds has been diverted to give various loans and advances for non business purposes - HELD THAT - The assessee has claimed to have borrowed loans for specific purpose of acquisition of property. According to the assessee, amount from Citibank has been partially used for business purpose and partially used for acquisition of property. Similarly loan taken from LIC and HDFC are for the purpose of acquisition of property. Likewise, interest paid on unsecured loan is fully funded for the purposes of business. There are divergent facts emerging from the orders of the lower authorities and the arguments of the assessee in light of certain evidences. It is the case of the AO that the assessee has diverted interest bearing funds for non business purposes, but the assessee claims that the loan taken from Citibank has been partially funded for business purpose and partially funded for acquisition of property. Notice that the assessee has taken a proposition in the light of the decision in the case of CIT vs Reliance Utilities & Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein held that when mixed funds are available, a general presumption goes in favour of the assessee that loans and advances are out of interest free funds and no part of interest bearing funds has been used. Consequently, no interest expense has been disallowed. In this case, the assessee has filed enough evidence to prove that loan has been partially borrowed for the purpose of business. The issue needs to be re-examined by the AO in the light of claim of the assessee that the Citibank loan has been partially funded for business purpose. - Appeal filed by the assessee is allowed for statistical purpose.

Summary

Issues:
1. Disallowance of interest expense by Assessing Officer.
2. Disallowance of interest paid against loans from LIC and HDFC.
3. Disallowance of interest expenditure by CIT(A).
4. Appropriateness of disallowance of interest expenses.
5. Application of funds for business and property acquisition.
6. Arguments based on the decision of Hon’ble Bombay High Court.
7. Re-examination of the issue by the Assessing Officer.

The judgment involves an appeal against the order of CIT(A) regarding the disallowance of interest expenses for Assessment Year 2012-13. The assessee, engaged in the business of dealer of pressure reducing valves, filed the appeal challenging the disallowance of interest expenses amounting to Rs. 648,422 by the Assessing Officer. The CIT(A) upheld the disallowance, stating that the interest-bearing funds were used for non-business purposes, such as subsidizing investments and property acquisitions. The CIT(A) highlighted that the funds were not entirely utilized for business activities, leading to the disallowance of interest expenditure.

The assessee contended that the loans were specifically borrowed for business purposes and property acquisitions. The CIT(A) observed that the interest expenses were claimed without a direct link to the loans obtained for property acquisitions. The assessee's argument regarding the availability of own funds was dismissed, emphasizing the diversion of interest-bearing funds for non-business activities. The CIT(A) confirmed the disallowance of interest expenses, citing the mismatch between fund usage and business requirements.

The assessee further argued that the interest paid on loans, including overdrafts, was utilized for business purposes. The contention was supported by evidence of transactions related to business activities. The Assessing Officer and CIT(A) maintained that interest expenses were disallowed due to the diversion of funds for non-business purposes. The dispute centered on whether the loans were entirely used for business needs or partly diverted for personal investments.

In the light of arguments presented, the Tribunal directed a re-examination of the issue by the Assessing Officer. The Tribunal acknowledged the possibility that the Citibank loan was partially used for business purposes, warranting a review of the disallowance. The Tribunal referred to the decision of the Hon’ble Bombay High Court regarding the presumption favoring the assessee when mixed funds are involved. Consequently, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a detailed assessment of fund utilization for business and property acquisitions.

In conclusion, the judgment addresses the intricacies of interest expense disallowance concerning fund diversions for non-business purposes. The Tribunal's decision underscores the importance of establishing a clear link between borrowed funds and their utilization, emphasizing the need for a thorough review by the Assessing Officer to determine the allowable interest expenses based on business requirements and property acquisitions.