By TIOL News Service

NEW DELHI, FEB 06, 2014: THE issue before the Bench is - Whether when the assessee does not utilise the borrowed funds for business purpose and spends the same to purchase equity shares as investments, interest paid on such loans is not allowable as per provisions of Sec 36(1)(iii). And the answer goes against the assessee.

Facts of the case

The assessee borrowed the sum of Rs. 22.50 crores from 'U' as loan which was utilized for purchasing the equity shares of DNL as investments. AO applied provisions of section 36(1)(iii) observing that the borrowed money was not utilized for the purpose of business. The CIT (A) confirmed the findings of AO but set off the interest received from 'C' on advance given against the interest paid.

Revenue contended that the money borrowed from 'U' was not for the purpose of business and, therefore, the entire disallowance of interest was to be sustained. There is no provision under the Income-tax Act for setting off the interest received against the interest paid on the money which was not borrowed for the purpose of business.

Assessee contended that the money borrowed from 'U' and the interest received from 'C' was inextricably connected. To acquire shares in DNL, assessee company took loan from 'U'. Earlier the shares were to be purchased through 'C' to whom advance was given by major shareholder of the assessee. However, the shares were later on purchased by assessee only. The amount advanced to 'C' was transferred to 'U' to fund the investment. Thus, there was direct nexus of interest received with interest paid.

After hearing both the parties, the ITAT held that,

++ Section 36 provides the deductions which are to be allowed while computing the income under the head 'profit and gains of business'. Under Section 36(1)(iii), deduction is allowable for interest paid in respect of money borrowed for the purpose of business or profession. The assessee paid interest to 'U'. The sum of Rs.22.50 crores was borrowed from 'U' and, on the same day, the amount was invested for purchase of shares of DNL. The shares of DNL were kept by the assessee as investment and not as stock-in-trade. Therefore, the money was borrowed by the assessee from UFPL not for the purpose of business but for the purpose of investment in the shares of another company and disallowance is confirmed;

++ CIT(A) allowed the set off on the ground that had the funds not been given to 'C', the same should have been available for making the investment for the purchase of shares and there would be lesser borrowing of funds with lesser interest burden. Thus, CIT(A) allowed the relief on the basis of consequence of certain presumptive events. That income is to be computed on the basis of facts as they existed and not on the basis of some hypothesis that had the assessee not advanced to 'C', it would have been required to borrow less money. The assessee may have interest income on its capital or on its non-interest bearing funds received from somebody else but the said interest cannot be set off against the interest payment on the basis of some hypothesis or presumption. Therefore, the finding of CIT(A) is reversed;

++ even when the assessee has not carried on the business, the certain expenses which were required to be incurred for maintaining the corporate status of the assessee is allowable deduction. Moreover, the assessee carried on the business during the accounting year relevant to the assessment year under consideration, whatever small scale may be of the business. Moreover, AO himself applied Section 36(1)(iii) while considering the allowability of the interest paid to 'U'. The disallowance of the expenses was not justified.

(See 2014-TIOL-69-ITAT-DEL)