2025 (7) TMI 243 - AT - Income Tax

Disallowance of interest expenditure - as per AO assessee has diverted funds for non business purposes - assessee is engaged in the business of manufacturing trading and export of woolen carpets - assessee enjoys credit limit from the bank and paid interest on credit against the limits - stand of assessee is that the interest expenditure claimed in P L account is exclusively for the purpose of business - HELD THAT - A perusal of ledger account reveals that the interest expenditure as claimed in the P L account is also reflected in the ledger account. Whereas the assessee has taken Home Loan for purchase of flats at Panorama and Lilac Infracon P. Ltd. from ICICI Bank Ltd. It is not emanating from the accounts furnished by the assessee that the interest expenditure claimed in P L account includes interest paid to ICICI Bank Ltd. Thus find merit in the submissions of the assessee hence disallowance of interest expenditure is deleted. Assessee appeal allowed.

Summary

The core legal issue considered by the Tribunal pertains to the allowability of interest expenditure amounting to Rs. 3,11,520/- claimed by the assessee in the Profit and Loss account for the assessment year 2016-17. Specifically, the question is whether the interest expenditure disallowed by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) (CIT(A)) relates to business purposes or non-business purposes, thereby determining its deductibility under the Income Tax Act, 1961.

The Tribunal analyzed the following key points related to the issue:

Relevant Legal Framework and Precedents: The deductibility of interest expenditure under the Income Tax Act hinges on the principle that expenses must be incurred wholly and exclusively for the purpose of business or profession. Interest on borrowed capital used for business operations is generally allowable, whereas interest on funds diverted for non-business or personal investments is disallowable. The AO and CIT(A) relied on this principle to disallow the interest expenditure, treating the investment in flats and advance payments as non-business related.

Court's Interpretation and Reasoning: The Tribunal scrutinized the factual matrix and accounting records to ascertain the nature of the interest expenditure. The assessee's contention was that the interest expenditure debited to the Profit and Loss account pertained solely to business credit facilities utilized for manufacturing, trading, and export operations. The investments in flats at Panorama and Lilac Infracon Pvt. Ltd. were made from own funds and a separate home loan from ICICI Bank, the interest on which was not debited to the Profit and Loss account. This was supported by ledger accounts and bank statements submitted by the assessee.

Key Evidence and Findings: The ledger accounts revealed that the interest expenditure of approximately Rs. 1.04 crore debited to the Profit and Loss account related to three Bank of Baroda accounts, all connected with business credit facilities. In contrast, the home loan interest from ICICI Bank, which financed the property acquisitions, was not reflected in the Profit and Loss account but was debited to the party account. The AO and CIT(A) erred in assuming that the interest expenditure disallowed was part of the interest debited to the Profit and Loss account. The Tribunal found no evidence that the disallowed interest formed part of the business interest expenditure claimed.

Application of Law to Facts: Applying the principle that only interest expenditure incurred wholly and exclusively for business purposes is deductible, the Tribunal held that the interest on home loans for acquiring flats, which was not charged to the Profit and Loss account, could not be disallowed on the ground that it was related to non-business investments. Since the disallowed interest expenditure was not part of the business interest claimed, the AO's and CIT(A)'s disallowance was unjustified.

Treatment of Competing Arguments: The Revenue argued that the interest expenditure was unrelated to business and hence disallowable. However, the Tribunal emphasized the assessee's distinct accounting treatment separating business interest and home loan interest. The Tribunal gave due weight to the ledger evidence and the assessee's submissions, which demonstrated that the disallowed interest was not part of the business interest claimed. The Revenue's contention was found to lack evidentiary support.

Conclusions: The Tribunal concluded that the disallowance of interest expenditure of Rs. 3,11,520/- was unwarranted. The interest expenditure claimed in the Profit and Loss account was exclusively for business purposes, while the interest related to property investments was not charged to the Profit and Loss account and hence not deductible or disallowable under the impugned order. Consequently, the appeal was allowed, and the disallowance was deleted.

Significant Holdings:

"It is not emanating from the accounts furnished by the assessee that the interest expenditure claimed in P&L account includes interest paid to ICICI Bank Ltd. I find merit in the submissions of the assessee, hence, disallowance of interest expenditure Rs. 3,11,520/- is deleted."

The Tribunal established the core principle that disallowance of interest expenditure must be based on clear evidence that the interest claimed relates to non-business purposes and is charged to the Profit and Loss account. Mere investments in property from own funds or separate loans, where interest is not charged to business accounts, do not justify disallowance of business interest expenditure.

Final determination: The disallowance of Rs. 3,11,520/- interest expenditure was set aside, and the appeal of the assessee was allowed. The interest expenditure reflected in the Profit and Loss account was held to be incurred wholly and exclusively for business purposes, and the Tribunal found no justification for disallowance based on the facts and accounting evidence presented.