2014 (12) TMI 1068 - HC - Income Tax

Interest paid on borrowings - Whether the Tribunal is right in deleting the addition u/s 36(1)(iii) being the amount of interest paid by the assessee on the borrowing which amounts the assessee lent to another party with whom the assessee had business dealings Held that - The Tribunal was rightly of the view that the assessee is having business dealing with GMMSS Ltd. - assessee could sell its goods to the extent of ₹ 157 lakhs during the year to GMSS Ltd. - assessee company also earned ₹ 4.04 Lakhs GMMSS Ltd. - assessee company could also earn 45% gross profit out of the sale made to GMMSS Ltd. - it cannot be said that the interest free advances were made without business consideration - the funds have been borrowed by the assessee company - the transactions are genuine and they are also not entered into with any malafide intention to deprive the Department from lawful revenue, which is otherwise payable by the assessee - The dominant intention of these transactions was for ultimate benefit of the assessee and, thus, the same was entered into with business considerations - as decided in S.A.Builders Ltd. Vs. Commissioner of Income Tax (Appeals) and Another, 2006 (12) TMI 82 - SUPREME COURT - assessee borrowed the funds, such funds have been borrowed for the purpose of business, the assessee has also paid interest on such funds, the case of the assessee is also not covered under the provisions of Section 40A(2) - the interest is allowable under the provisions of Section 36(1)(iii) the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
Challenge to ITAT order by Revenue on deletion of interest amount under Section 36(1)(iii).

Analysis:

1. The appellant revenue challenged the ITAT order dated 16.06.2000, which partly allowed the appeal filed by the assessee regarding the addition of interest paid on borrowing lent to another party. The appeal raised substantial questions of law regarding the deletion of Rs. 9,82,129 under Section 36(1)(iii) of the Income Tax Act.

2. The appellant contended that both the CIT(A) and ITAT erred in deciding the matter, claiming that the Tribunal did not properly assess the available materials. The respondent supported the Tribunal's order, arguing that all materials were considered, citing the Apex Court's decision in S.A.Builders Ltd. Vs. Commissioner of Income Tax case.

3. The Tribunal observed that the borrowed funds were used for business activities, resulting in profits for the assessee. The Tribunal emphasized that for interest deduction under Section 36(1)(iii), the capital must be borrowed for business purposes and paid as an allowance. The Tribunal found the advances made to the other party were for systematic business activities, not personal relations.

4. The Tribunal concluded that the interest deduction was allowable under Section 36(1)(iii) as the funds were borrowed for business, interest was paid, and the transactions were genuine with no malafide intention. The Tribunal held that the addition of Rs. 9,82,129 was deleted, reversing the CIT(A)'s findings.

5. The High Court, considering the Apex Court's precedent and the Tribunal's reasoning, upheld the Tribunal's decision. The Court found no legal or factual basis to disturb the Tribunal's findings, leading to the dismissal of the revenue's appeal. Consequently, the question posed in the appeal was answered in favor of the assessee and against the revenue.