2010 (4) TMI 387 - HC - Income Tax

Interest on borrowed capital- the assessee is engaged in manufacturing of different types of equipment and spare parts mainly for steel and power sector railways and cement plants and execution of turnkey projects. The assessee filed its return of income for the assessment year under consideration declaring a total income of Rs. 2, 64, 42, 974. The Assessing Officer (AO) on examination of the account books of the assessee noticed that the assessee made an advance of Rs. 50 lakhs to Air Construction Consultant Pvt. Ltd. Calcutta and during the year the debit balance was transferred to the account of Smt. Shashi Gupta and Master Nitin Gupta at Rs. 25 lakhs each. The explanation of the assessee before the Assessing Officer was that Shri Vijay Kumar is a partner in the assessee-firm in his capacity as karta of Vijay Kumar (HUF). There was credit balance of Rs. 1, 80, 25, 443 for which no interest is being paid and since the above two persons were members of the Hindu undivided family the firm had given interest free advances to them because of substantial credit balance in the account of the Hindu undivided family. The Assessing Officer rejected the explanation and calculated the interest at the market rate at 18 per cent. at Rs. 15, 44, 754 disallowed the interest equal to this amount out of the interest claimed by the assessee. Commissioner(Appeals) confirm the demand. Tribunal accept the appeal of the assessee on the ground that no evidence has been brought on record to prove that the amounts borrowed by the assessee were not utilized by the assessee for its own business but were diverted as advance to members of the Hindu undivided family free of interest. Held that- Tribunal was justified in deleting the addition.

Summary

Issues:
1. Whether the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 15,44,750 being disallowance out of interest equivalent to the amount of interest receivable by the respondent on interest-free loan under section 36(1)(iii) of the Income-tax Act, 1961?

Analysis:
1. The appellant/Revenue appealed against the Tribunal's order regarding the disallowance of Rs. 15,44,750 out of interest equivalent to the interest receivable by the respondent on an interest-free loan. The assessee, engaged in manufacturing, had given interest-free advances to family members due to a credit balance in the Hindu undivided family account. The Assessing Officer disallowed the interest, but the Tribunal allowed the appeal, noting the lack of evidence linking borrowed funds to interest-free loans. The appellant contended that the borrowed funds were diverted for non-business purposes, but the respondent argued that sufficient funds were available, and the Tribunal's finding was based on evidence, citing the balance-sheet.

2. The appellant argued that the interest-free loans were not for business purposes, as evidenced by a significant interest burden and insufficient evidence linking borrowed funds to family advances. The Tribunal's finding of a credit balance in the family account without interest payment was supported by the balance-sheet. Citing the case of Tirupati Trading Co., the appellant highlighted the need to prove business purpose for interest deductions. The respondent countered that the Tribunal's finding was based on evidence, referencing the balance-sheet and the lack of proof of diversion of borrowed funds.

3. In the case of Munjal Sales Corporation, the Supreme Court considered the availability of profits to cover an interest-free loan. Similarly, the High Court in CIT v. Hotel Savera emphasized the need for evidence to indicate advances from borrowed funds. In this case, the Tribunal's finding that no evidence showed diversion of borrowed funds for interest-free family advances was supported by the balance-sheet and profits earned. Consequently, the Court dismissed the appeal, finding no substantial question of law for consideration.