2019 (9) TMI 502 - HC - Income Tax

Deduction of interest - allegation that assessee had lent money from borrowed funds to the husband - principles of commercial expediency - diversion of funds - HELD THAT - No allegation against the assessee of diversion of funds, considering the relationship between the assessee and her husband, who had established the dhall mill and that the assessee is at an advantage in obtaining finished product from her husband's dhall mill and she will be assured of time delivery of the processed dhall and assured of quality processing and obviously at discounted rates. There is no endeavour made by the Tribunal to examine the specific stand of the assessee that the assessee had interest free funds. CIT(A) decided the case against the assessee based on its own personal opinion without any material available on record thus the finding rendered by the CIT(A) is perverse. This perverse finding affirmed by the Tribunal was without any material placed before it to come to a conclusion that the role played by the assessee's husband as a miller is virtually insignificant. Decisions have to be taken based on the return of income filed by the assessee and the documents that may be called for by the Assessing Officer. There is no room for the authority to incorporate their personal opinion while completing the assessment, which precisely was done by the CIT(A) and therefore, has to necessarily held to be perverse and unsustainable. Assessee's husband stood as a guarantor to the assessee for obtaining cash credit facility was not disbelieved. CIT(A) rejects it by stating that the value of the property was not equal to that of the amount borrowed. This is not the concern of the CIT(A), it is for the bank, which extended the loan to be worried about the adequacy of the security offered by the borrower. In any event, the assessee's husband stood as a guarantor for the loan transaction making him jointly and severally liable along with the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Deduction of interest on borrowed funds for commercial expediency.
2. Application of principles of attribution when mixed funds are involved.

Analysis:
1. The primary issue in this case revolves around the deduction of interest on borrowed funds by the assessee for commercial expediency. The Assessing Officer disallowed a sum of ?1,34,842/- as the assessee lent money to her husband without charging interest, while paying interest to the creditors from whom she borrowed funds. The Commissioner of Income Tax Appeals affirmed this decision, stating that the husband's collateral security was of lesser value than the money advanced by the assessee. The Tribunal upheld this decision, claiming that the role of the assessee as a miller did not require a significant working capital deployment, overlooking the commercial benefits derived by the assessee from her husband's dhall mill.

2. The second issue pertains to the application of principles of attribution when mixed funds are involved. The assessee argued that the loans were utilized entirely for her business and were secured by hypothecation of stock, emphasizing that there was no diversion of funds. The Tribunal failed to consider the interest-free funds available to the assessee and dismissed the appeal based on personal opinions without substantial evidence. The High Court held that the findings of the lower authorities and the Tribunal were perverse and warranted intervention, emphasizing that decisions should be based on factual records and not personal opinions. The Court also highlighted the guarantor role of the assessee's husband in obtaining the cash credit facility, which made him jointly and severally liable with the assessee.

In conclusion, the High Court allowed the appeal filed by the assessee, answering the substantial questions of law in favor of the assessee, emphasizing the need for decisions to be grounded in factual evidence rather than personal opinions.