2016 (7) TMI 1091 - HC - Income Tax

Disallowance of interest u/s 36(1)(iii) - property were acquired indirectly i.e. in the name of partners - diversion of loan - Held that - Possession of rights and interest in an asset can be gained in several ways and not merely by the purchase thereof. It can be gained for instance by virtue of or under a lease, licence or on rent. If the legislature intended restricting the ambit of the proviso to capital borrowed for the purchase of an asset, it would have provided so expressly. The legislature has deliberately used a wider expression acquisition of an asset to ensure that assessees do not get the benefit of a deduction unless and until they put such assets to use. There is nothing in the plain language of the section or otherwise that persuades us to hold that the legislature intended excluding all modes of acquisition of an asset other than by the purchase thereof. Admittedly, the loan was taken by the appellants for the acquisition of the asset, namely, the said immovable properties. The proviso does not operate only in cases where the assessee acquires the asset directly. The mode of acquisition is irrelevant and the proviso would apply so long as the primary intention of the assessee is to acquire the asset for the purpose of its business. We do not express any opinion where the acquisition of the asset is only incidental to the transaction or arrangement such as in the case of a merger of companies under Sections 391 and 394 of the Companies Act. In the present case, the appellants/assessees allegedly acquired the assets by advancing interest-free loans to their partners to enable the partners to purchase the assets and to make the same available to them for the extension of their existing business. The assessees are in the business, inter alia, of selling footwear. They contend that they required the additional premises or showrooms to sell the same. This was, therefore, in any event, an indirect acquisition of the asset by a particular mode. The sole intention was to acquire the assets. - Decided in favour of the respondents/revenue

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal erred in upholding the disallowance of interest under Section 36(1)(iii) of the Income Tax Act for the Assessment Year 2009-10?

Comprehensive Analysis:
The appeal before the High Court concerned the disallowance of interest amounting to ?28,70,608 under Section 36(1)(iii) of the Income Tax Act for the Assessment Year 2009-10. The appellants, a partnership firm, contended that they had raised loans at interest and advanced interest-free loans to their partners for purchasing properties to be used for their business. The Assessing Officer disallowed the deduction due to the properties not being put to use, as per the proviso to Section 36(1)(iii). The CIT (Appeals) rejected the appellants' contention, leading to the appeal (paragraphs 2-3).

The High Court considered the legislative provisions and the facts presented. It noted that the proviso to Section 36(1)(iii) disallows interest deduction for capital borrowed for asset acquisition until the asset is put to use. The court assumed the appellants' case to be true, acknowledging the purpose of borrowing and the utilization of funds for business expansion. However, it emphasized that the assets purchased by the partners were not put to use during the relevant period, leading to the deduction being disallowed (paragraphs 5-7).

The court addressed the argument that the proviso only applies when the assessee directly purchases the asset, emphasizing that the term "acquisition" encompasses various modes beyond direct purchase. It highlighted that the legislature intended to restrict deductions until assets are utilized, regardless of the mode of acquisition. In this case, the appellants indirectly acquired assets through interest-free loans to partners for business expansion, meeting the proviso's conditions for disallowance (paragraphs 8-11).

Ultimately, the High Court ruled in favor of the revenue, dismissing the appeal. It concluded that the proviso to Section 36(1)(iii) applies to cases where assets are acquired for business purposes, irrespective of the mode of acquisition. As the primary intention was asset acquisition for business extension, the interest deduction was rightly disallowed, leading to the dismissal of the appeal (paragraph 12).