2021 (12) TMI 641 - AT - Income Tax

Disallowance of interest paid on loan u/s 36(1) (iii) - Diversion of interest bearing funds during the period under consideration - assessee advanced loan to Shri Babu Lal Natani on interest @ 15% and derived income there form as interest and declared in the income from other sources , the rate of interest charged 15% is more than interest on borrowed funds - whether the directorship in the Companies is profession or not? - HELD THAT - The assessee is director in Natani Rolling Mills (Pvt,) Ltd and Neelkanth Industries (Pvt.) Ltd since long back and purchased shares of Neelkanth Industries (Pvt.) Ltd. prior to the assessment year 2009-10 of ₹ 47,65,000/- and there was no any further investment in the shares and the share in another Company Natani Rolling Mills (Pvt.) Ltd. were also purchased before the assessment year 2009-10 of ₹ 7,32,000/-, thus, the total share were purchased of ₹ 54,97,000/-, thus, we are view of that the assessee has the same shares only and there in no any direct nexus of investment out of the loan during the period under consideration because no any shares were purchased during the period under consideration.. Assessee took loan for business purposes from the financial institutions namely Bajaj Finance and thereafter from the HDFC Bank Ltd. The assessee has been doing business as working partner in the partnership firms as well as profession/vocation as Director in three Companies. From perusal of Section 2(36) Profession includes Vocation definition of the profession the assessee is entitled for deductions of interest on loans took for business/profession. Thus, it is crystal clear that the interest was paid in the business and commercial expediency apart from that there was no any direct nexus between the investment in shares and loans taken thereafter - as the assessee borrowed the funds from the bank as well as other, the borrowing was for the business purposes only and interest thereon was paid to the Bank as well as to others also.See SA BUILDERS LTD. VERSUS COMMISSIONER OF INCOME-TAX 2006 (12) TMI 82 - SUPREME COURT We found merit in the contentions raised by the assessee and the ld. DR has not brought on record any new material to rebut or controvert the submissions and documents placed before us, therefore, we direct to delete the disallowances confirmed by the ld. CIT(A) - Decided in favour of assessee. Disallowance with regard to excess interest paid on borrowings to the Bank who given the loan, because the assessee could not utilize the whole amount in his own business - As per the deed of partnership, it is crystal clear that the assessee could not took interest on advances as working capital to it s partnership firm i.e. Oliya Import Export exceeding 12% which was advanced as working capital. It is important to mention here that in the course of business, it is not necessary to have profit only and there should not be any loss therein. As far as advances to Giriraj Buildcon is concerned, we noticed that the Giriraj Buildcon is a sister concern of the assessee as proprietor of the Giriraj Buildcon was also a director in the Natani Rolling Mills Pvt. Ltd. and had dealing in purchasing from the company during the period under consideration and in subsequent year also. Hence, looking to the commercial expediency given some advance for his business. Considering the totality of facts and circumstances of the case, material placed on record as well as the relevant provisions of the Act, we found merit in the contentions raised by the assessee and the ld. DR has not brought on record any new material to rebut or controvert the submissions and documents placed before us, therefore, we direct to delete the disallowance. - Decided in favour of assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of interest expenditure on borrowed funds for purchasing shares.
3. Disallowance of excess interest paid on borrowings used for advances to sister concerns and working capital in partnership firms.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed an application for condonation of delay of 78 days in filing the appeal, explaining that the delay was due to personal and professional circumstances, including heavy losses in the companies and relocation for business purposes. The Tribunal considered the rival submissions and relevant material on record, applying the principles laid down by the Hon’ble Supreme Court in *Collector, Land Acquisition Vs. Mst. Katiji (1987) 167 ITR 471*. The Tribunal emphasized a liberal approach in interpreting "sufficient cause" for condonation of delay to ensure substantial justice. The Tribunal found the reasons for the delay to be bona fide and not a device to cover ulterior purposes. Consequently, the delay was condoned, and the appeal was admitted for hearing.

2. Disallowance of Interest Expenditure on Borrowed Funds for Purchasing Shares:
The assessee contested the disallowance of ?7,55,837/- as interest expenditure on borrowed funds used for purchasing shares in Natani Rolling Mills Pvt. Ltd. and Neelkanth Industries Pvt. Ltd. The Tribunal noted that the shares were purchased before the assessment year 2009-10, and no shares were purchased during the period under consideration. The assessee argued that the loan was taken for business purposes and that directorship in companies constitutes a profession under Section 2(36) of the Income Tax Act, 1961. The Tribunal referred to judgments in *Nabadwip Chandra Roy vs Commissioner Of Income-Tax (1962) 44 ITR 591 Gauhati* and *Commissioner of Income Tax Vs Rajeev Lochan Kanoria (1994) 208 ITR 616 (Cal)*, which recognized directorship as a vocation. The Tribunal concluded that the interest paid was for business and commercial expediency, fulfilling the conditions under Section 36(1)(iii) of the Act. Therefore, the disallowance was deleted.

3. Disallowance of Excess Interest Paid on Borrowings:
The assessee also challenged the disallowance of ?2,46,132/- as excess interest paid on borrowings used for advances to sister concerns and as working capital in partnership firms. The Tribunal observed that the assessee, as a working partner, invested in the partnership firm Oliya Import and Export, but due to Section 40(b)(iv) of the Act, could not obtain interest exceeding 12%. The Tribunal noted that advances to Giriraj Buildcon, a sister concern, were made for commercial expediency. Citing the principles from *S.A. Builders Ltd. Vs Commissioner of Income Tax (Appeals), Chandigarh and Others (2007) 1 SCC 781*, the Tribunal emphasized that the borrowed funds' use should be viewed from the perspective of commercial expediency. The Tribunal found merit in the assessee's contentions and directed the deletion of the disallowance.

4. Condonation of Delay (Ground No. 4):
The Tribunal reiterated that the delay in filing the appeal had already been condoned, and there was no need to adjudicate this ground afresh.

Conclusion:
Both appeals for the assessment years 2014-15 and 2015-16 were allowed, with the Tribunal directing the deletion of the disallowances and condoning the delay in filing the appeals. The orders were pronounced in the open court on 23rd November 2021.