2014 (4) TMI 969 - HC - Income Tax

Deletion of interest borrowed funds utilized for non-business purpose Held that - The Tribunal have rightly examined in detail the pattern of investment, loans and advances as also considering the fixed assets and cash noted that there was no fresh borrowing and already borrowed funds had reduced from Rs1953 lakhs to Rs.1239 lakhs - The substantial reduction led the tribunal to note that it would not be possible to hold that the borrowed funds were not used for business purpose merely because the investment, loans and advances given to the partners and the debit balance of the partner s capital account had gone up. The Tribunal has rightly held that Rs.97.26 lakhs interest free advance were made whereas the assessee had interest free fund to the tune of Rs.95.80 lakhs available with it, only for the remaining sum of Rs.1.46 lakhs, it had confirmed the disallowance of the interest - there is no reason to interfere in the reasonings in absence of any perversity - in absence of any fresh borrowings in A.Y. 2003-2004, reduction of borrowed funds could not be assumed to be for non-business purpose with corresponding advances to the partners in wake of appreciation of entire gamut of facts and details presented before the Revenue authorities Decided against revenue.

Summary

Issues:
- Whether the Appellate Tribunal was justified in deleting the addition of interest of Rs.87,35,694?
- Whether the borrowed funds were utilized for non-business purposes?
- Whether the finding of the Appellate Tribunal is perverse to this extent?

Analysis:
1. The judgment concerns two tax appeals for A.Y. 2003-2004 and A.Y. 2004-2005, both addressing the same question of fact and law. The substantial legal issue raised was whether the Appellate Tribunal was correct in deleting the addition of interest amounting to Rs.87,35,694, ignoring the alleged non-business use of borrowed funds by the assessee.

2. The Assessing Officer disallowed the expenditure after noting that the borrowed funds were used for non-business purposes, including advancing money to close relatives without interest. The CIT(Appeals) upheld this disallowance, stating that the borrowed funds were not utilized for business purposes in the relevant year.

3. However, the Tribunal, after detailed examination, found that there was no fresh borrowing in the year under consideration and that the already borrowed funds had substantially reduced. The Tribunal concluded that it could not be assumed that the borrowed funds were not used for business purposes, considering the overall financial transactions of the assessee.

4. The Tribunal also noted that the assessee had provided interest-free loans to partners and relatives, while having access to interest-free borrowed funds. After analyzing the available funds and utilization patterns, the Tribunal confirmed the disallowance of interest only on a minimal amount.

5. The High Court, after reviewing the Tribunal's analysis and reasoning, found no perversity in the decision. It upheld the Tribunal's findings, emphasizing the absence of any substantial question of law raised by the Revenue. The Court dismissed the tax appeals, concluding that the Tribunal's decision was justified based on the presented facts and details.

6. In summary, the High Court affirmed the Tribunal's decision to delete the addition of interest, as it found no grounds to interfere with the Tribunal's reasoning regarding the utilization of borrowed funds for business purposes and the availability of interest-free funds with the assessee. The judgment highlights the importance of a thorough examination of financial transactions and fund utilization in tax matters.