Case Note & Summary
The Commissioner of Income Tax, Aurangabad, filed an appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Pune Bench, dated 30th November 2009. The Tribunal had confirmed the order of the Commissioner of Income Tax (Appeals), Aurangabad, dated 10th August 2009, which deleted the disallowance of interest of Rs. 1,50,000 made by the Assessing Officer under Section 36(1)(iii) of the Act. The Assessing Officer had disallowed the interest on the ground that the assessee, Siddheshwar Sahakari Sakhar Karkhana Ltd., a cooperative sugar factory, had made an investment of Rs. 15,00,000 in a sister concern, and the borrowed funds on which interest was paid were used for that investment. The assessee contended that it had sufficient own interest-free funds, including share capital and reserves, which exceeded the investment amount. The Commissioner (Appeals) and the Tribunal accepted this contention and deleted the disallowance. The High Court, after hearing the Revenue's counsel, noted that the assessee's own funds were more than Rs. 2 crores, while the investment was only Rs. 15 lakhs. The court held that when the assessee has sufficient own funds, it cannot be presumed that borrowed funds were used for the investment. The Revenue failed to establish any nexus between the borrowed funds and the investment. The court found no substantial question of law and dismissed the appeal.
Headnote
A) Income Tax - Disallowance of Interest under Section 36(1)(iii) - Own Funds Exceeding Investment - The issue was whether interest on borrowed capital could be disallowed when the assessee had sufficient own interest-free funds to cover the investment in a sister concern. The court held that when the assessee's own funds exceed the investment, it cannot be presumed that borrowed funds were diverted for non-business purposes. The Tribunal's deletion of disallowance was upheld. (Paras 1-6) B) Income Tax - Burden of Proof - Revenue's Failure to Establish Nexus - The Revenue failed to establish that the borrowed funds were actually used for making investment in the sister concern. The court held that the onus is on the Revenue to show that borrowed funds were diverted for non-business purposes, and in the absence of such proof, no disallowance under Section 36(1)(iii) is warranted. (Paras 4-6)
Issue of Consideration
Whether the Income Tax Appellate Tribunal was correct in law in deleting the disallowance of interest of Rs. 1,50,000 made by the Assessing Officer under Section 36(1)(iii) of the Income Tax Act, 1961, when the assessee had made investment in a sister concern out of borrowed funds?
Final Decision
The High Court dismissed the appeal, holding that no substantial question of law arises. The order of the Income Tax Appellate Tribunal deleting the disallowance of interest was upheld.
Law Points
- Section 36(1)(iii) of Income Tax Act
- 1961
- disallowance of interest on borrowed capital
- own funds exceeding investment
- no presumption of diversion of borrowed funds for non-business purposes
