2001 (8) TMI 273 - AT - Income Tax

Summary

Issues:
Disallowance of interest expenditure on estimate basis.

Analysis:
The appeal was filed against the order confirming the disallowance of interest expenditure of Rs. 7,20,000 by the AO. The assessee-company had paid this interest to Peerless General Finance & Investment Co. Ltd. on a loan of Rs. 45,00,000. The AO disallowed the interest payment as it was advanced interest-free to Janapriya Hospitals Corporation Ltd. The CIT(A) upheld the disallowance, stating that the interest-free advance was not for business purposes. The CIT(A) relied on the fact that the advance had not materialized into shares allotment. The ITAT considered the arguments of both parties and examined the main object of the assessee-company, which was to invest in shares and securities. The ITAT found that the interest payment was in line with the business activities of the company and allowed the deduction under section 36(1)(iii) of the IT Act, 1961.

The ITAT emphasized that the expenditure or allowance should relate to the main business object. The crucial question was whether the business carried on by the assessee was the purpose for which the borrowings were made. The ITAT noted that no income generated from the investment during the previous year should not lead to the disallowance of interest attributable to the borrowed capital. The ITAT found that the interest-free advance made for acquiring shares was a business decision aligned with the main object of the company. The ITAT considered the confirmation of shares allotment by Duncan Gleneagles Hospitals Ltd. as evidence of the business purpose being achieved.

The ITAT rejected the Revenue's contention that the borrowed funds were not strictly for interest-free advances. It clarified that interest paid on borrowed capital is deductible if used for business purposes, regardless of diversion within the business. The ITAT concluded that the interest paid on the advance for the acquisition of shares was allowable under section 36(1)(iii). Therefore, the ITAT reversed the decisions of the lower authorities and directed the AO to allow the interest of Rs. 7,20,000 as a deduction.

In conclusion, the ITAT allowed the appeal filed by the assessee-company, overturning the disallowance of interest expenditure and directing the AO to permit the deduction under section 36(1)(iii) of the IT Act, 1961.