ITAT, JABALPUR BENCH When interest expenditure on borrowed funds is not allowable as deduction

When interest expenditure on borrowed funds is not allowable as deduction



No prudent businessman would borrow funds on interest and keep his own funds idle.



ITAT, JABALPUR BENCH, JABALPUR

Yash Vehicles Pvt. Ltd.

v.

Addl. CIT

ITA NO. 08/Jab/08

June 5, 2009

RELEVANT EXTRACTS:

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4. The facts of the case are that the assessee is engaged in the business of sales and service of vehicles, auto parts and accessories. The relevant return of income was filed on 31st October 2004 at a total income of Rs. 2,47,150/-. The Assessing Officer, as per order dated 26th December 2006, determined the total income at Rs. 10,73,450/-. The Assessing Officer made addition of Rs.8,07,549/- disallowing the interest paid to M/s Vee Key Alloy Conductors (P) Ltd. for the reasons that the interest payment was not ior the purpose of business, that the payment was made to a related concern and the expenditure on interest amounting to Rs.8,07,549/- was liable to be disallowed u/s 40A(2)(b) of the Act. According to the Assessing Officer, the assessee during the year was having substantial cash balance of Rs.1,14,71,885/-, out of which major amount was stated to be in Tejori. It was claimed by the assessee that M/s Vee Key Alloy Conductors (P) Ltd. had taken loan from Indian Overseas Bank for giving the loan to the assessee-and the interest in question was paid thereon. According to the assessee M/s Vee Key Alloy Conductors (R) Ltd. had paid interest to the bank and since the money borrowed by the assessee from the aforestated sister concern was utillised for the purpose of the business, the interest paid by the assessee was admissible deduction being expenditure incurred wholly and exclusively for the purpose of business. It was also claimed that there was no nexus between the funds utilised for the purpose of business after taking loan from M/s Vee Key Alloy Conductors (P) Ltd. And the amount kept in the Tejori of the assessee. The Assessing Officer rejected the submissions of the assessee for the reason that as on 31st March 2004, hp unsecured loan taken from M/s Vee Key Alloy Conductors (P) Ltd. amounted to Rs.1,08,63,173/- whereas the assessee was having cash in hand of Rs. 1,14,71,885/- which was more than the loan taken from the sister concern. The Assessing Officer held that the assesses company, instead of utilising its own fund, had taken loan from sister concern M/s Vee Key Alloy Conductors (P) Ltd., without any business need and the payment of Interest of Rs.8,07,549/- was not admissible u/s 36(1)(iii) of the Act because the deduction was to be allowed only for the amount of interest paid in respect of the capital borrowed for the purpose of the business of the assessee. The Assessing Officer also observed that no evidence was filed to show that the funds borrowed from the sister concern, as discussed above, were In fact utilised for the purpose of the business. He also observed that the assessee had admitted that the cash balance available in the Tejori account and the books of account of the assessee as on 31/03/2004 was used for the purpose of business in the subsequent year and thus, there was no scarcity of funds to justify the Joan tn question and the expenditure of Rs.8,07,549/- on account of interest incurred during the accounting period under consideration was not for the purpose of business hence, inadmissible. The Assessing Officer relied on the decisions in the cases of:

(1) Triveni Engineering Works Ltd. v. CIT [1987] 167 ITR 742

(2) CIT vs. H. R. Sugar Factory.[1991] 190 ITR 743 (All)

(3) CIT vs. Saraya Sugar Mills (P) Ltd. [1992] 193 ITR 575 (All)

(4) M/s Vijayakumar Mills Ltd. v. CIT [1992] 194 |TR 197 (Mad)

and held that the payment of interest on loan taken from sister concern, mspite of huge cash balance, was not an allowable business expenditure.

5. The learned CIT(A) confirmed the addition as per discussion in para 4 of his order which is reproduced below:

"4. I have carefully considered and the facts and submissions made by the Id AR. First of all it is noted that if the books of account are to be believed then there was a huge cash available through out the year of more than a crore of rupees. But no prudent business man would like to keep so much cash idle for such a long time. It shows that the books of account do not depict the true state of affairs. This fact not only raises a serious doubt on the correctness and completeness of the books but also leads to an inescapable inference that the cash as per books of account in reality was not available i.e. it ought to have been diverted for purposes other than business. In view of this, it is to hold that the impugned loans were raised not for the purposes of the business but to compensate the cash-in-hand which actually was not available for some reason or the other. The interest expenditure thus cannot be held to be incurred for the purposes of the business and hence is not allowable as deduction u/s37. This disallowance therefore is confirmed."

9. We have carefully considered the issue in the light of orders of the lower authorities, material placed on record and rival submissions. It is very clear that the assessee had retained the funds as per its balance sheet and there was no necessity for taking the loan from the sister concern, because sufficient funds were available with It for making the payment of outstanding liability on account of purchases. Its own funds available with the assessee were admittedly not utilised during the relevant account period and the case laws relied upon by the assessee, with due respect, are of no help to the assessee because in this case the borrowed funds were not diverted to the Directors of the concern but the own funds were not at ail utilised for the purpose of the business, which remained with the assessee throughout the year and thus there was no business necessity to take the loan from the sister concern out of the amount which the sister concern itself borrowed from the Indian Overseas Bank. The facts are within the special knowledge of the assessee but the assessee cannot claim that there was shortage of funds which necessitated to use the funds borrowed from sister concern for depositing in the bank accounts from which the payments were made for outstanding purchases because it had sufficient funds of its own to make the payments. Thus, in our considered opinion, the assessee has taken the V liability of loan taken by the sister concern tiom Indian Overseas Bank without any business necessity. With due respect, the decision cited are of no help to the assessee because in the case of S. A. Builders (supra), the assessee had paid interest on borrowed capital but had advanced interest free loan to the sister concern. The Hon'ble Apex Court remanded the matter to the Tribunal for fresh decision in the light of its observations that the High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern and to find out how the money was utilised by the sister concern in order to decide whether it was for commercial expediency. With due respect, in the case of the assessee the borrowed funds were no diverted to sister concern but the funds borrowed by the sister concern from the Indian Overseas Bank were taken by the assessee without any business requirement in view of the admitted fact that it was having sufficient funds of its own even in preceding year because the cash and bank balance as 31/03/2003 is also Rs.91,41,334/- as can be seen from the balance sheet as on 31/03/2004, placed on record at page 32 of the paper book and the interest payment on the loan taken from sister concern was held not for the purpose of business by the learned CIT(A). The other cases relied upon by the learned counsel for the assessee are also on the issue of diversion of borrowed funds at a lower rate of interest or without charging any interest, to the related persons whereas in the case of the assessee the funds have been borrowed from sister concern on payment of interest without any business necessity and despite availability of funds with the assessee itself. The learned counsel for the assessee could not also file any evidence to show that the funds were kept for expansion of business as per the decision of the Directors of the assessee company and his submission is also not found correct on perusal of director's report dated25/08/2004, placed on record as per pages 24 and 25 of the paper book. We are therefore, of the opinion that with due respect, the facts of the case are peculiar and clearly different from the facts of the cases cited by the assessee. The assessee could not justify the funds borrowed from the sister concern in view of the fact that sufficient funds were available with it. In our considered opinion, no prudent businessman would borrow funds on interest and keep his own funds idle. Besides, (he transaction of loan is also not third party transaction but the funds borrowed from the Indian Overseas Bank by the sister concern have been taken as loan by the assessee without any business necessity because its own funds have remained idle throughout the year. The assessee has also admitted that the funds were kept idle and not utilized during the course of the accounting period. We, therefore, see no reason to interfere with the order of the learned CIT (A), which is confirmed.



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