2021 (5) TMI 508 - AT - Income Tax

Addition u/s 36(1)(iii) - deduction towards interest paid on loans borrowed for business purposes - HELD THAT - There is no merit in the findings of the AO, because the assessee has filed rental agreement copy to prove that it has taken premises on rent by paying lease rental deposit to Mr. G.Ramesh on a monthly rental of ₹ 75,000/- and such rent shall commence from 01.04.2013. The assessee has also produced necessary evidence to prove that it has started paying rental for the premises from next financial year. Assessing Officer has not disputed rental agreement entered into between the assessee and Mr. G.Ramesh, but he has disallowed interest only on the ground that although, rental agreement has been entered into by paying deposit, but no rental payment has been made for the current financial year. We find that reasons given by the AO to disbelieve rental agreement between the parties is not on sound footing, because it is for the parties to decide from which date rental payment shall commence. Merely for the reason that there is no rental payment for current financial year, genuine rental agreement and consequent rent advance paid cannot be considered as diversion of funds for non-business purposes so as to disallow interest expenses paid on loan borrowed for the purpose of business. But, the learned CIT(A) without appreciating the facts simply confirmed additions made towards disallowance of interest expenses. We set aside the order passed by the learned CIT(A) and direct the Assessing Officer to delete additions made towards disallowance of proportionate interest u/s.36(1)((iii) - Appeal filed by the assessee is allowed.

Summary

Issues:
Assessment of business income, Disallowance of interest expenses, Interpretation of Section 36(1)(iii) of the Act

Assessment of Business Income:
The appellant, an authorized dealer of a company, executed a Lease Rent Agreement for a stock yard. The Assessing Officer (AO) disallowed lease rent advance as non-business purpose, citing no debit for rental payments. Additionally, an unsecured loan received from a director was deemed non-business, disallowing interest payment. The AO concluded that funds were diverted for non-business purposes. The CIT(A) upheld the AO's decision, stating the rental advance was not utilized by year-end, indicating diversion of funds. However, the AR argued that the lease deposit and loan were separate business transactions. The Tribunal noted that all business advances are outside the scope of Section 36(1)(iii) of the Act. The rental agreement proved the business purpose, as rent payment commenced the following year. The Tribunal found no merit in the AO's findings, overturning the disallowance of interest expenses.

Disallowance of Interest Expenses:
The AO disallowed interest paid on loans borrowed from a director, alleging diversion of interest-bearing funds for non-business purposes. The CIT(A) upheld this decision, rejecting the rental agreement as an attempt to circumvent the diversion of funds. The Tribunal, however, found that the rental agreement and subsequent rent payment proved the business purpose, and the disallowance of interest expenses was unwarranted under Section 36(1)(iii) of the Act. The Tribunal directed the AO to delete the additions made towards disallowance of interest.

Interpretation of Section 36(1)(iii) of the Act:
Section 36(1)(iii) of the Act deals with deductions for interest paid on loans borrowed for business purposes. If interest is used for non-business purposes, it cannot be allowed as a deduction. The Tribunal clarified that all business advances fall outside this provision. The AO's disallowance was based on the diversion of funds for non-business purposes, which the Tribunal found unsubstantiated. The Tribunal emphasized that genuine business transactions, supported by agreements and subsequent actions, should not be disallowed under Section 36(1)(iii) of the Act.

This detailed analysis of the judgment highlights the issues of assessment of business income, disallowance of interest expenses, and the interpretation of Section 36(1)(iii) of the Act. The Tribunal's decision overturned the disallowance of interest expenses, emphasizing the importance of genuine business transactions and supporting documentation in determining the deductibility of expenses under the relevant legal provisions.