2018 (11) TMI 1434 - HC - Income Tax

Allowance of interest expenditure u/s 37 - interest paid to the depositors - Held that - The assessee also debited its capital account and corresponding credit was given to the account of the college. It then availed of an overdraft facility of ₹ 5.5 lakhs from an account maintained for business purposes and disbursed it to the college. The balance was treated as a loan availed by the assessee from the College. The assessee paid interest to the bank on the overdraft and to the college for the loan, which were claimed as business expenditure. The overdraft facility was held to be not availed for business purposes and the so called loan from the college was held to be the assessees own funds. Here too there was no business in finance carried on by the Firms and the partners had merely taken advances from the firm, the application of which was not the concern of the firm. We, hence, find that the advances obtained by the partners were not in the nature of business carried on by the assessee and, hence, there could be no claim of business expenditure insofar as the interest paid to the depositors, the public. We, hence, answer the other questions of law framed against the assessee and in favour of the Revenue. We delete the order of the Tribunal insofar as the allowance of interest expenditure under Section 37. The order of the AO disallowing the expenditure on interest paid to the depositors is sustained on the grounds herein above mentioned as distinguished from the view taken by the AO. The appeals would stand partly allowed.

Summary

Issues:
1. Interference with substantive and protective additions by the Tribunal.
2. Allowance of interest paid on deposits not taken for business purposes.
3. Characterization of withdrawals from the firm by partners as loans for business purposes.

Analysis:

Issue 1:
The case involved appeals challenging the Income Tax Appellate Tribunal's orders regarding interference with substantive and protective additions. The respondent-assessees operated a Multi Speciality Hospital and a Real Estate business. The Tribunal found that the speculative computation of interest earned based on partner investments was unjustified. The Tribunal also determined that the assessees had a business relationship with their partners, justifying the expenditure. The High Court upheld the Tribunal's decision to delete the additions, ruling in favor of the assessees against the Revenue.

Issue 2:
Regarding the allowance of interest paid on deposits not taken for business purposes, the AO disallowed the expenditure claimed by the assessees under Section 37(1) of the Income Tax Act. The first appellate authority upheld the addition to income but deleted the claimed expenditure. The Tribunal ultimately found that the assessees did not engage in a finance business, and the advances taken by partners were not part of the assessee's business. The High Court agreed with the AO's disallowance of interest expenditure, citing precedents and confirming that the partners' advances did not constitute business expenditure.

Issue 3:
The characterization of withdrawals from the firm by partners as loans for business purposes was a key point of contention. The High Court referenced a Supreme Court decision to support its finding that the advances obtained by partners were not part of the assessee's business. Consequently, the interest paid to depositors was not deemed a business expenditure. The High Court ruled in favor of the Revenue on this issue, deleting the Tribunal's order allowing interest expenditure under Section 37 and sustaining the AO's disallowance of interest paid to depositors.

In conclusion, the High Court's judgment addressed various issues surrounding the taxation of the assessees' businesses, partner transactions, and interest expenditures, ultimately ruling in favor of the assessees on some aspects and in favor of the Revenue on others.