2022 (8) TMI 243 - AT - Income Tax

Disallowance u/s 36(1)(iii) - proportionate interest for fund utilized for business purpose - HELD THAT - As investment made in debt mutual fund was part of business activity because funds being ideal for invested for earning income, the argument of counsel does not in any manner establish that investment in mutual fund is part of the business activity of the assessee. The assessee has clearly admitted that it was engaged in advancing loan to corporate and bill discounting. In the profit loss account, the assessee has shown interest income from advancing loan only and this activity of investment in mutual fund is not the business activity irrespective of the fact that ideal funds have been invested. The funds have not been invested due to business or commercial expediency, and same have been invested for earning income on ideal funds. Therefore, interest corresponding to borrowed money utilized in said investment is disallowed. The ground No. 1 of the appeal of the assessee accordingly is dismissed. Calculation of the funds utilised for business purpose - HELD THAT - The amount of interest allowable was required to be considered after including above two amounts. Accordingly, we accept this contention of the assessee. We set aside the order of the Ld. CIT(A) on the issue in dispute and restore the matter to the file of the AO for re-computation of the amount of the interest allowable in terms of section 36(1)(iii) in view of the plea of including the amount representing doubtful debt and representing as amount lying in bank account for funds utilized for business purposes. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. In the result, the ground No. 2 of the appeal is partly allowed for statistical purposes. Capitalization of the amount of interest disallowed u/s 36(1)(iii) - HELD THAT - Here the assessee is claiming that if interest corresponding to investment in mutual funds is not allowed as revenue expenditure, then same should be treated as cost of acquisition of the said mutual fund. We are of the opinion that the issue of claim of the interest amount as cost of acquisition will arise at the time of the sale of the said mutual funds and therefore issue is premature at this stage, therefore, we are not adjudicating upon the said issue. The ground No. 3 of the appeal is accordingly dismissed.

Summary

Issues Involved:
1. Disallowance of interest expense under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Proportionate disallowance of interest expenditure.
3. Capitalization of disallowed interest.

Detailed Analysis:

1. Disallowance of Interest Expense:
The primary issue concerns the disallowance of Rs. 25,38,825/- of interest expense under Section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer (AO) held that the borrowed funds were utilized for non-business purposes, specifically investments in debt-oriented mutual funds. The AO restricted the claim of interest expenditure to Rs. 30,14,226/- for funds utilized for business purposes and disallowed the balance. The AO's decision was based on the observation that the assessee had a significant investment in mutual funds, which were not related to the business of providing loans and bill discounting. The AO relied on the decisions of the Hon'ble Madras High Court, which established that interest on borrowed funds diverted for non-business purposes is not allowable. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, stating that the assessee's own funds were insufficient to cover the investments in mutual funds, and thus the borrowed funds were used.

2. Proportionate Disallowance of Interest Expenditure:
The assessee argued that the disallowance should be restricted to Rs. 9,74,983/- based on the proportionate use of borrowed funds for non-business purposes. The assessee provided a detailed calculation showing the availability of own funds and the proportionate interest disallowance. The Tribunal found this alternative plea convincing and noted that the AO should have considered the amounts of Rs. 51,00,000/- advanced to M/s Elder Healthcare Ltd. and Rs. 75,83,341/- lying in the bank account while calculating the funds utilized for business purposes. The Tribunal set aside the CIT(A)'s order on this issue and remanded the matter to the AO for re-computation of the interest allowable, including the amounts representing doubtful debt and funds lying in the bank account.

3. Capitalization of Disallowed Interest:
The assessee sought capitalization of the disallowed interest under Section 36(1)(iii) as part of the cost of acquisition of the mutual funds. The Tribunal opined that this issue would arise at the time of the sale of the mutual funds and was premature at this stage. Therefore, the Tribunal did not adjudicate on this issue and dismissed the ground.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal directed the AO to re-compute the allowable interest, considering the amounts representing doubtful debt and funds lying in the bank account for business purposes. The disallowance of Rs. 25,38,825/- was upheld, and the request for capitalization of disallowed interest was dismissed as premature.