By TIOL News Service

CHENNAI, JUNE 21, 2013: THE issue before the Bench is - Whether it is incumbent upon the assessee to produce substantial materials before the Court or any other authority to show that the borrowed funds are not diverted for any purpose other than business. And the answer goes against the assessee.

Facts of the case

The assessee is engaged in the business of export of beedi leaves, food grains and also in transport contracts. On scrutiny of the return of the assessee, it was found that the assessee had advanced loan to the Directors to a sum of Rs.3.91 crores as against what was given earlier at Rs.3.23 crores. The AO viewed that the assessee had not utilised the borrowed funds for business purpose, but diverted the same for advancing loans to the Directors and, hence, the claim of interest payment was disallowed. On appeal before the CIT(A) the assessee contended that the borrowed funds were used only for the purpose of business, particularly for the purchase of Masoor Dhall from Sri Saravana Agency. The borrowed funds related to the earlier year and there was no borrowal during the relevant assessment year. The assessee contended that the money advanced to the Directors/shareholders during the year were only out of the assessee's own funds and there was no nexus between the borrowed funds and the advance made to the Directors. The CIT(A) called for a remand report from the AO and thereafter going through the report rejected the appeal of the assessee. On further appeal by the assessee, the Tribunal pointed out that the assessee had not proved before the AO that the interest bearing borrowed funds were exclusively used for the business purpose and they have not diverted as by way of loan to the Directors. The Tribunal also pointed out to the fund flow position, whereby the advances made to the Directors during the immediate previous year showed the increase compared to the earlier balance and also the advances made by the Directors of the company had come down.

Still aggrieved, the assessee has filed this appeal before the Tribunal. The counsel for the assessee contended that the borrowed sum was utilised for the purpose of purchase of Masoor Dhall from Sri Saravana Agency and also placed reliance on the decision of this Court in Commissioner of Income Tax V. Kandagiri Spinning Mills Ltd. and contended that the amounts advanced by the assessee to the Directors being out of commercial expediency and in any event, the amount advanced were not out of the borrowed funds.

Having heard the parties, the High Court held that,

++ we do not agree with the above-said contention of the counsel appearing for the assessee, particularly for the reason that the issue is purely one of fact. Except for stating that the assessee had made borrowal in the immediate preceding accounting year, no materials were placed before this Court or before any other authority to show that the borrowed funds were not diverted for any purpose other than business. The mere contention that the borrowed funds were utilised for the purchase of Masoor Dhall from Sri Saravana Agency, per se, cannot be taken as a good ground to accept the plea of the assessee, considering the fact that consistently the advances given to the Directors had increased from Rs.3.23 crores to Rs.3.91 crores without corresponding return thereof and with no better performance in the business of the assessee. In the circumstances, we reject the arguments placed by the learned counsel appearing for the assessee based on the materials produced before this Court, which were already considered by the Tribunal as well as by the Commissioner of Income Tax (Appeals);

++ as far as the reliance placed on the decision reported in (Commissioner of Income Tax V. Kandagiri Spinning Mills Ltd.) is concerned, the same is distinguishable for the simple reason that the decision rested on the factual findings therein in that case by the Commissioner of Income Tax (Appeals) as well as by the Tribunal;

++ it may be seen that the above-said decision referred to the decision of this Court reported in (K.Somasundaram & Brothers V. CIT), wherein a similar question, as one before this Court, had arisen. In the said decision, this Court pointed out that the capital amount so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business and so long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of income from the business. As rightly pointed out by the Tribunal, when the assessee had not showed any such nexus of the borrowed funds utilised in the business and continued to be used in the business, we have no hesitation in confirming the order of the Tribunal. Accordingly, this Tax Case (Appeal) stands dismissed.

(See 2013-TIOL-489-HC-MAD-IT)