2019 (11) TMI 25 - AT - Income Tax

Disallowance of interest on borrowed capital u/s. 36(1)(iii) - sufficiency of interest-free capital - HELD THAT - While the depletion during the year, in the form of withdrawals and loss, is at ₹ 3.29 lacs, amounting to 3.3% (of the impugned advances), leading to an average (by taking the mean of opening and closing balances) would therefore approximate to 4%. The ratio of the borrowed capital financing the non-business advances may thus be reasonably taken at 96% (as against 100% by the Revenue). Sure, some variables, as the unsecured and secured loans as at the beginning of the year, or indeed the average for the year, may well be different. Why, the non-business advances itself may well be, for all we know, at a higher figure (than as at year-end), absorbing such interest-free or, as the case may be, interest bearing capital. However, it was for the assessee to set up a case in this regard. In fact, even no contention to this effect, i.e., that the figures as at the beginning of the year are at a material variance, stands raised. What stands stated in the preceding paragraphs, was discussed during hearing, and the assessee, also represented by Sh. Anil Vasudeva, CA (i.e., along with Sh. Arora) on 07/3/2019, required to work out the adequacy or otherwise of the interest-free capital during the year, substantiating, thus, his case with facts and figures - no such exercise was done. Sh. Vasudeva, who presented the assessee s case on 07/3/2019, and was explained to state his case with reference to the contractual obligations attending the different interest-bearing or, as the case may be, interest free, liabilities, did not appear on the next date, with no explanation for the same. And neither was any adjournment sought. Rather, Sh. Arora, the assessee counsel, proceeded de hors what had transpired during the previous hearing, reiterating, without reference to any factual basis, that the assessee had sufficient interest-free capital to preclude the disallowance of interest on borrowed capital. The assessee s case, thus, continues to be no more than a bald statement, i.e., as it was before the Revenue authorities. No reason to interfere, except to direct relief to the extent of 5% (five per cent.), by further relaxing the interest-free financing component of the impugned advances by the assessee, obtaining for the year. No mistake in the working of the interest by the AO having been pointed out, the same works to ₹ 63,611/-. - Decided partly in favour of assessee.

Summary

Issues:
Sustainability of disallowance of interest on borrowed capital u/s. 36(1)(iii) of the Income Tax Act, 1961.

Analysis:
The judgment pertains to an appeal against the Commissioner of Income Tax (Appeals)'s order dismissing the assessee's appeal contesting the assessment u/s. 143(3) of the Income Tax Act, 1961 for the Assessment Year 2013-14. The single issue raised in the appeal is the sustainability of the disallowance of interest on borrowed capital u/s. 36(1)(iii) of the Act, amounting to ?12.72 lacs. The assessee, engaged in various businesses, claimed interest on secured loans borrowed ostensibly for business purposes. The Assessing Officer found that significant advances were made for non-business purposes, leading to the disallowance. The CIT(A) upheld the disallowance, emphasizing the inadequacy of interest-free funds compared to the total advances made. The assessee contended that there was sufficient interest-free capital available, but the Tribunal highlighted the importance of distinguishing between fund-based and non-fund based liabilities to ascertain the adequacy of interest-free capital. The Tribunal analyzed the balance sheet, concluding that the interest-free capital was insufficient to cover the non-business advances. Despite the assessee's arguments, no concrete evidence was provided to support the claim of adequate interest-free capital. Consequently, the Tribunal partially allowed the appeal, granting relief of 5% on the disallowance amount.

In conclusion, the judgment delves into the intricacies of interest disallowance on borrowed capital under section 36(1)(iii) of the Income Tax Act. It emphasizes the necessity of substantiating claims with factual evidence and highlights the importance of differentiating between fund-based and non-fund based liabilities in determining the adequacy of interest-free capital. The Tribunal's decision to partially allow the appeal underscores the significance of presenting a well-supported case to challenge tax assessments effectively.