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TMI Blog2012 (3) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) The AO has erred in law as well as on fact in making disallowance of Rs. 15,66,180/- out of interest expenses. The ld. CIT(A) has erred in confirming the same. (3) The AO erred in law as well as on facts in disallowing the expenses of Rs. 30,46,389/- treating the same as prior period expenses. The ld. CIT(A) has erred in confirming the same. (4) The AO erred in law as well as on facts in making addition of Rs. 7,88,215/- on account of alleged inflated labour transportation expenses. The ld. CIT(A) has erred in confirming the addition to the extent of Rs. 2,50,000/-." 3. At the time of hearing, the ld. A.R. submitted that ground No.1 is general in nature and ground Nos.3 and 4 are not pressed. Therefore, same are dismissed. Now effective ground remains to be considered is in respect of disallowance of interest of Rs. 15,66,180/-. During the assessment proceedings, the AO noticed that the assessee has given interest-free advances for Rs. 1,30,51,504/- to 13 parties of which details have been given at page-2 of the assessment order. The AO calculated interest by applying 12% rate of interest and calculated Rs. 15,66,180/- and same was added to the total income by dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee. If the expenditure incurred is ostensibly incurred for the business, but if in reality is not for the purpose of business then such expenditure is not allowable. 4.2 Section 36(1)(iii) of the Act refers to "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession". The capital borrowed should be for the purposes of the business or profession. It is implicit in this provision that the capital so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business. So long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of the income from the business. The interest payable on the capital borrowed is a liability which continues till such time as the amount borrowed is repaid. Such interest is allowable under the provision only for the reason that the amount on which interest is paid continues to be used in the business and the payment of such interest is, therefore, necessary for the purpose of running the business. 4.3 The object of the provision is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowing as a deduction under section 36(1)(iii) even after such diversion. In cases where diversion occurs immediately after the borrowing and the borrowed amounts are not invested in the business at all, but diverted for other purposes, then there should not be any cloud of doubt that interest paid on such borrowed amounts is not allowable deduction. The factum of deferment, in cases where such diversion of funds from the business is clearly established from the facts on record, does not entitle the assessee to claim the benefit of deduction in respect of interest paid on the amounts borrowed but not presently used in its business. The time at which the diversion takes place is not the only relevant criterion but it is the fact of the diversion which is material and once it has been shown that there has been diversion of interest on the amount borrowed, but subsequently diverted would not qualify for deduction. Any view to the contrary would not in the least sub serve the object of the legislative provision, but it would only open the gates for the assessees to borrow merrily and after ostensibly using it in the business for a short period and at a subsequent point of time divert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the personal expenditure of the assessee and, as this sum of money was not actually used for the business, the interest paid thereon could not be allowed as permissible deduction. 4.6 The relevant finding of the Court is reproduced below:- "We do not think that we can give effect to this argument. Indisputably, these amounts were borrowed only for the purpose of business of the family. The assessee drew out from time to time various sums of money aggregating to Rs. 1,77,984 from the business. It is not a case where any particular sum purporting to be borrowed on behalf of the business was spent for household expenses. This is a case where the loans were taken for carrying on the business but the family used to withdraw some amounts from the business whenever occasions arose. The family was surely entitled to withdraw from the capital supplied by it with the result of the capital being depleted. There is, therefore, no substance in the submission that the fact that part of the amount borrowed was later on used for personal expenses, would deprive the assessee of the benefits." 4.7 From the above judgment of Hon'ble Andhra Pradesh High Court we find that the assessee has righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest-free or utilized other than for business purposes, no disallowance is warranted. If the own funds are not sufficient to cover interest-free advances, a proportionate disallowance is warranted. While examining interest-free funds available with assessee and interest-free funds given a care is required to be taken that these funds were not related to business of the assessee. Capital and Reserves are certainly assessee's own interest funds. This proposition is fortified by the decision of ITAT in the case of Torrent Financiers (supra), judgment of Allahabad High Court in the case of Prem Heavy Engg. Works (P.) Ltd. (supra) and the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corpn. (supra). It is to note that decisions of the Hon'ble Punjab and Haryana High Court in Munjal Sales Corpn. (supra) wherein the Hon'ble Punjab and Haryana High Court followed CIT v. Abhishek Industries Ltd. [2006] 156 Taxman 257 have been reversed by the Hon'ble Supreme Court. Thus the decision of the Punjab and Haryana High Court in the case of Abhishek Industries Ltd. (supra) has been impliedly reversed on the issue. 5. In the light of above discussion, we find that in the case unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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