2019 (4) TMI 1655 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) on proportionate basis - assessee is in the business of financing having mixed funds in its kitty i.e own funds as well as borrowed funds - it had borrowed monies at an average rate of interest at 13.5% and lent to various persons at an average rate of interest at 12.40%. - disallowance of interest u/s 36(1)(iii) by applying the differential rate of interest at 1.1% - test of commercial expediency - HELD THAT - Once the lending is meant in the ordinary course of financing activities of the assessee company, then charging / non-charging of interest or charging of interest at a lesser rate would not fall in the domain of the revenue. It is for the businessman to decide the same and the revenue cannot step into the shoes of the businessman in this regard. The test of commercial expediency is to be viewed from the point of view of businessman and not from the point of view of the revenue. Reliance in this regard is placed on the decision in the case of CIT vs Dhanrajgiri Raja Narasingirji 1973 (3) TMI 6 - SUPREME COURT . Once it is proved and accepted that the lending is part of business activities of the assessee company and once there is no finding recorded by the lower authorities that the borrowed funds were diverted for non-business purposes, there cannot be any disallowance of interest u/s 36(1)(iii) of the Act on a proportionate basis. Accordingly, the ground no. 1 raised by the assessee is allowed. Disallowance of set off of business loss and unabsorbed depreciation against the total income of the assessee - claim disallowed by the AO on the ground that the details furnished by the assessee in the return of income under the relevant column differed with the details submitted during the course of assessment proceedings and the assessee failed to reconcile the same - CIT-A however found certain discrepancies in the claim made by the assessee and accordingly directed the AO to verify the amount of losses brought forward / carried forward and compute the correct amount of set off available and grant the same to the assessee as per law - HELD THAT - There is nothing wrong in the direction of the CIT-A in asking the AO to verify the claim of brought forward business and depreciation losses from earlier years. The assessee cannot be aggrieved by this direction. Hence the order of the ld CIT-A in our considered opinion, does not call for any interference. Accordingly, the ground no. 2 raised by the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Claim of set-off of business loss and unabsorbed depreciation against total income.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii) of the Income Tax Act:

The primary issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in upholding the disallowance of interest under Section 36(1)(iii) of the Income Tax Act on a proportionate basis. The assessee, a public limited company engaged in providing financial services, had declared an interest income of ?12,96,57,884 and debited interest and finance charges amounting to ?12,95,71,373. The Assessing Officer (AO) observed that the assessee had borrowed funds at a higher rate of interest and lent them at a lower rate, leading to a differential rate of interest of 1.41%, which was disallowed proportionately.

The assessee argued that it had received more interest than it paid, and thus no disallowance was warranted. The CIT(A) recalculated the average rate of interest paid and received, concluding that the assessee borrowed at an average rate of 13.5% and lent at an average rate of 12.40%, resulting in a differential rate of 1.1%. Consequently, the CIT(A) restricted the disallowance to ?70,16,489.

Upon review, the Tribunal noted that the assessee had mixed funds (own and borrowed) and was engaged in financing activities, including lending to sister concerns with interest charged. The Tribunal emphasized that the test of commercial expediency should be viewed from the businessman’s perspective, not the revenue’s. Citing the Supreme Court decision in CIT vs. Dhanrajgiri Raja Narasingirji (91 ITR 544), the Tribunal held that once lending is part of the business activities and there is no finding of diversion of borrowed funds for non-business purposes, no disallowance of interest under Section 36(1)(iii) can be made on a proportionate basis. Therefore, the Tribunal allowed the assessee's ground on this issue.

2. Claim of Set-off of Business Loss and Unabsorbed Depreciation:

The second issue pertained to the assessee's claim of set-off of business loss of ?16,29,034 and unabsorbed depreciation of ?14,75,566 against its total income. The AO disallowed this claim due to discrepancies between the details furnished in the return of income and those submitted during the assessment proceedings, which the assessee failed to reconcile. The CIT(A) directed the AO to verify the brought forward/carry forward losses and compute the correct set-off amount as per law.

The Tribunal found no error in the CIT(A)'s direction for verification by the AO, asserting that the assessee could not be aggrieved by such a direction. Hence, the Tribunal upheld the CIT(A)'s order on this issue and dismissed the assessee’s ground.

Conclusion:

The appeal of the assessee was partly allowed. The Tribunal ruled in favor of the assessee on the disallowance of interest under Section 36(1)(iii), but upheld the CIT(A)'s direction regarding the verification of the set-off of business loss and unabsorbed depreciation.