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TMI Blog2013 (8) TMI 744X X X X Extracts X X X X X X X X Extracts X X X X ..... ) has also wrongly accepted the A.O.'s view without considering the section 36(1)(iii) of the Act. The loss in the interest account was on account of different rates charged from different parties on loans and advances taken and loans and advances given. For allowing deduction under section 36(1)(iii), it is to be seen whether conditions stated in section 36(1)(iii) has been satisfied or not. In the case under consideration, the assessee has satisfied all the conditions that the borrowed fund was used for the purpose of business as prescribed under section 36(1)(iii) of the Act. Also, it was not the case of the A.O. that the borrowed fund was not utilised for the purpose of business of the assessee. - ITA No. 234/Agra/2013, C.O. No. 19/Agra/2013 - - - Dated:- 23-8-2013 - Shri Bhavnesh Saini And Shri A. L. Gehlot,JJ. For the Respondent : Shri S. D. Sharma, Jr. D.R. For the Respondent : Shri K. K. Jain, Advocate ORDER Per Bhavnesh Saini, J.M. The departmental appeal as well as the cross objection of the assessee are directed against the order of ld. CIT(A)-I, Agra dated 26.02.2013 for the assessment year 2009-10. 2. The Revenue in the departmental appeal c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerns for other than business purposes and he has adopted a general method for making disallowance of interest paid by computing the average rate of interest paid and average rate of interest received and then, disallowing the interest paid at the rate of difference between two average rates without going into details of utilization of funds borrowed and the purpose of giving of loans. He has also not given details of working of such average rate of interest paid and rate of interest received. Such method of disallowance of interest has not been found to be as per the provision of the Income- tax Act as well as various decisions of Hon'ble Supreme Court and Hon'ble High Courts on this matter. Even in the case of CIT Vs. Abhishek Industries Ltd. (supra), relied upon by the AO in her remand report, it has been held that there should be nexus of use of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii). Therefore, for making disallowance of interest claimed u/s 36(1)(iii), it has to be established that the fund borrowed has been diverted for non-business purpose. In the present case, though the assessee (appellant) has charged interest on loans given to sist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank on OD account at 11.5% , while the rate of interest charged to Shri Ratan Singh is at 12% and hence, no disallowance of interest is required to be made for rate of interest charged to Shri Ratan Singh at 12%. The loan given to Shri Ratan Singh has also been received back this year. 9.6. In view of the above facts gathered by me from the ledger account of the assessee(appellant), I have examined the purpose of giving of two loans and their source , which have been found to be given to two parties during the year under consideration. They are Shree Krishna Ship Breaking Industries and Neuromed Imaging Centre Pvt. Ltd. The account of Shree Krishna Ship Breaking Industries is a running account being maintained with the assessee(appellant) and in this account sometimes balance has become credit and some time debit . The account with this party is relating to trading as well as for the purpose of giving of loan also but rate of interest charged on loan given to this party is as high as 18% that is same as the rate of interest charged to the parties from whom loans have been taken. On examination of Bank Ledger, I have found that the loan given to this party is out of borrowed fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18% S.no. Date Name of party giving loan Amount (Rs.) 1 03.07.2008 Dipti G. Shah 12,00,000 2 03.07.2008 Manjuben G. Shah 8,00,000 3. 03.07.2008 Hitesh C. Shah 2,00,000 4. 03.07.2008 Gaurang G. Shah 1,50,000 5. 03.07.2008 Maitree G. Shah 1,00,000 6. 03.07.2008 Chimanlal M. Shah 1,00,000 7 03.07.2008 Dharmendra V. Shah 1,00,000 8. 03.07.2008 Shree Krishna Ship Breaking Inds 29,50,000 9. 03.07.2008 Narendra Himmatlal Shah 1,00,000 10. 03.07.2008 Star Ship Breaking Corpn. 15,00,000 TOTAL 72,00,000 II Loan taken at the rate of 15% 1 03.07.2008 Hiren Indl. Gas Supply Pvt. Ltd. 5,50,000 The above mentioned total amount of Rs.77,50,000/- was taken at higher rate of interest and after depositing this amount in the OD account, it is further passed on to M/s. Neuromed Imaging Centre Pvt. Ltd. at a less rate of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rowed at the rate of 15% As the loan is given at the rate of 12% from 04.07.2008 to 15.01.2009 Interest to be disallowed at the rate of 3% for 196 days (from 04.07.2008 to 15.01.2009), which comes to:- = 0.03 x 5,50,000 x 196 = Rs. 8,860/-/365 Thus, total interest to be disallowed out of the interest paid on borrowed fund not utilized in the business of the assessee(appellant) but used in giving loan to the sister a concern without there being any business expediency, would come to Rs. 2,40,838/- [ Rs. 2,31,978/- + Rs. 8,860/-]. Therefore, the AO is directed to disallow payment of interest claimed u/s 36(1)(iii) to the extent of Rs.2,40,838/- instead of Rs.38,79,887/- disallowed in the assessment order and the assessee(appellant) accordingly, gets a relief of Rs.36,39,049/- and all the ground taken from Ground nos. 1 to 4 are partly allowed . Ground no. 5 being general in nature is not required to be adjudicated upon separately." 4. The ld. DR relied upon the order of the AO. On the other hand, the ld. counsel for the assessee submitted that the issue is covered in favour of the assessee by the order of ITAT, Agra Bench in the case of same assessee for preceding assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss in interest account on account of different rates charged by the assessee, we would like to refer the observation of the Apex Court which was made in the case of CIT vs. Dhanrajgirji Raja Narasingirji, 91 ITR 544 (SC). It was observed by the Apex court that "it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best". In the case under consideration, the A.O. and the CIT(A) put their legs to the shoes of the assessee and determined the rate of interest paid and charged reasonably in accordance with their view which is not correct. The A.O. is empowered to examine only condition laid down under section 36(1)(iii) of the Act. Since there is no violation of conditions laid down in section 36(1)(iii) by the assessee, we therefore, find that interest claim of the assessee is fully allowable and we allow the same. The orders of the A.O. and the CIT(A) both are set aside and addition made by the A.O. of Rs.24,76,779/- and addition of Rs.2,83,302/- sustained by the CIT(A) are deleted. 7. The Cross Objection filed by the assessee is in respect of addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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