2019 (10) TMI 391 - AT - Income Tax

Disallowance of interest expenditure on unsecured loan borrowed and invested in the capital of two proprietary concerns as not allowable business expenditure - HELD THAT - From the perusal of the Balance Sheet itself it is noted that the borrowed funds which is to the tune of ₹ 92 lakhs which fund was thus utilized in the proprietorship concern and, therefore, the CIT(A)'s contention that utilisation of loan can only be proven through a cash flow statement cannot be countenanced in the facts of the case as discussed. CIT(A) erred in not appreciating the claim of the assessee in the right perspective and, therefore, since the amount which the assessee has borrowed has been utilized and invested by the assessee in the two concerns, the interest is an allowable expenditure. Moreover, it has also been brought to our notice that in the subsequent two assessment years i.e. for AY 2013-14 and 2014-15 the interest paid on the very same loan borrowed by the assessee which is carried forwarded from earlier years was allowed as business expenditure in the hands of the assessee. Thus, it is seen that AO has accepted the allowability of the said interest expenditure in subsequent years and, therefore, a consistent stand needs to have been taken and taking into consideration the facts noted supra, we allow the claim of the assessee. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of interest expenditure on unsecured loans.
2. Separate identity of the proprietary concern.
3. Deductibility of interest cost under Section 36(1)(iii) of the Income Tax Act.
4. Use of interest-bearing loans for business purposes.
5. Rule of Consistency in tax assessments.
6. Tax audit requirements under Section 44AB of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Interest Expenditure on Unsecured Loans:
The main grievance of the assessee was the disallowance of interest expenditure amounting to ?10,06,209/- on unsecured loans borrowed and invested in two proprietary concerns. The Assessing Officer (AO) disallowed the interest expenditure on the grounds that the interest was claimed in the personal Profit & Loss (P/L) account and not in the respective books of the proprietary concerns, which were subject to audit under Section 44AB of the Income Tax Act. The AO argued that business expenditure must always be shown and debited in the accounts of the business.

2. Separate Identity of the Proprietary Concern:
The assessee contended that there is no separate legal identity between the proprietary concern and the proprietor. The Tribunal referred to the Hon'ble Delhi High Court decisions in the cases of Svapn Constructions and Miraj Marketing Corporation, which held that a sole proprietorship firm is not a legal entity and cannot sue or be sued in its own name. The Tribunal accepted the argument that since the proprietary concern is not a separate legal entity, the interest expenditure incurred for the business purpose, even if accounted for in the books of the proprietor, should be allowable.

3. Deductibility of Interest Cost Under Section 36(1)(iii) of the Income Tax Act:
The assessee argued that the interest cost incurred on personal borrowings, which were invested in the proprietary concerns for earning business profit, should be deductible under Section 36(1)(iii) of the Act. The Tribunal noted that the investment in the proprietary concerns was substantial and could not be met entirely from the assessee's own funds, indicating that borrowed funds were utilized for business purposes.

4. Use of Interest-Bearing Loans for Business Purposes:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] questioned the utilization of the loan for business purposes. The CIT(A) required the assessee to prove the utilization of the loan with a cash flow statement, which was not provided. However, the Tribunal found that the balance sheet clearly reflected the investment in the proprietary concerns, and it could be safely assumed that the borrowed funds were used for business purposes.

5. Rule of Consistency in Tax Assessments:
The assessee argued that the interest paid on the same loans was allowed as a business expenditure in the assessments for the immediately preceding and subsequent assessment years. The Tribunal agreed that a consistent stand should be taken, and since the interest expenditure was allowed in subsequent years, it should be allowed for the assessment year in question as well.

6. Tax Audit Requirements Under Section 44AB of the Income Tax Act:
The AO initially disallowed the interest expenditure because it was not covered in the Tax Audit Report as per Section 44AB. The assessee clarified that no tax audit is required for individual accounts under Section 44AB, and both proprietary concerns were duly audited. The Tribunal accepted this explanation and found that the AO's insistence on including the interest expenditure in the audited accounts of the proprietary concerns was not justified.

Conclusion:
The Tribunal concluded that the interest expenditure on the unsecured loans utilized for the proprietary concerns was an allowable business expenditure. The appeal of the assessee was partly allowed, and the disallowance of ?10,06,209/- was set aside. The Tribunal emphasized the need for consistency in tax assessments and acknowledged the lack of separate legal identity for proprietary concerns. The order was pronounced in the open court on 25th September 2019.

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