2017 (11) TMI 855 - AT - Income Tax

Disallowance of interest on borrowed money - proof of money unitized for business purposes - purchase of plots - Held that - The assessee has achieved the turnover of Rs. 10, 08, 23, 511/- and the declared the gross profit rate @ 5.96% which is higher than the immediate preceding year when it was 3.15% only. The purchase of the plot was to expand the business of the assessee to make go-down as the assessee was paying rent on the go-downs. Thus there was a direct nexus of this expenditure with the business of the assessee. Since this expenditure was directly related to the business of the assessee the interest paid on the borrowed money cannot be disallowed. CIT(A) s observation that these plots were not utilized for the purpose of business is misplaced. The P&L account of assessee shows that the assessee was paying go-down rent of Rs. 6, 90, 366/- for the year under consideration F.Y 2012-13. Subsequently it was reduced to Rs. 3, 29, 264/- (F.Y 2013-14) which is evident from page No. 13 and 15 of the paper book respectively. Further the fixed assets schedule also shows that the assessee has spent on construction Rs. 16, 01, 000/- on these plots during the year under consideration. These plots are being utilized for the business purposes. The disallowance of interest on borrowed money was not justified as the money was utilized for business purposes only. - Decided in favour of assessee.

Summary

Issues:
Confirmation of disallowance of interest amounting to Rs. 2,37,675.

Analysis:
1. The appeal was filed by the assessee against the order of the ld. CIT(A)-I, Jaipur confirming the disallowance of interest of Rs. 2,37,675 for the A.Y. 2012-13.
2. The sole issue in all grounds of appeal was the confirmation of disallowance of interest of Rs. 2,37,675.
3. The assessee, engaged as a trader/commission agent, purchased a plot for Rs. 31,68,995 during the relevant year, and the Assessing Officer disallowed the interest on the borrowed capital for six months totaling Rs. 2,37,675.
4. The ld. CIT(A) upheld the disallowance stating that the borrowed funds were used for acquiring capital assets not put to use during the year.
5. The appellant argued that the plots were acquired for business expansion, leading to better fund utilization and savings in expenses, with a direct nexus to business expenditure, and interest funds were effectively utilized for business promotion.
6. The appellant relied on Section 36(1)(iii) of the Act, claiming deduction of interest paid for capital borrowed for business purposes, emphasizing that the revenue failed to establish any diversion of funds.
7. The Tribunal noted the increase in godown rents, the purpose of plot purchase for business extension, and the lack of utilization of plots during the year, concluding that the disallowance of interest was justified.
8. However, the Tribunal found a direct nexus between the borrowed funds and plot investment, rejecting the disallowance and allowing the appeal based on the expenditure's direct relation to the business.

This detailed analysis of the judgment highlights the key arguments, provisions, and conclusions regarding the disallowance of interest and the business purpose of the plot purchase, leading to the allowance of the appeal.