No Disallowance of Interest paid on Capital borrowed for Business purpose: ITAT [Read Order]

Recently, the Kolkata Bench of Income Tax Appellate Tribunal (ITAT) in M/s Rawalwasia & Sons Exim Ltd. vs. ITO held that interest paid in respect of capital borrowed for the purposes of the business or profession would be squarely allowable as the deduction under Section 36(1)(iii).

The assessee, M/s Rawalwasia & Sons Exim Ltd, which was earlier a firm got converted into a limited company. A partner of the firm, Shri. J.P Agarwal, became a major shareholder in the assessee company. Using the current account in the firm, which continued in the books of the assessing company, Shri. J.P Agarwal had overdrawn large amounts from the company. Due to the excessive borrowing made, no interest was disallowed till the assessment year 2008-09. The Assessing Officer found that the company had both expenses and income from borrowing as well as extending loans.  The company had an expense to the tune of Rs. 2.6 Crore towards the interest expenditure against loan of Rs. 39.16 crore.  Meanwhile, the company earned an income of Rs.1.63 Crore against loan of Rs.14.98 crore. It came to the notice of the A.O that the assessing company had advance funds to its Director and to a concern in which the Director was interested. The loans extended to interested parties were interest free and the A.O sought to disallow the proportionate interest claimed as deduction by the assessee.  The assessee conveyed to the A.O that the advances made to Director and to the company in which the director was interested were for the purpose of purchase of goods and in order to meet its business commitments and it was because of that fact interest free loans were extended. The assessee also pointed out that Shri. J P Agarwal had given two properties belonging to him as collateral security to the company to enable the bank to grant credit facilities to the company.

The A.O rejected the submissions of the assessee and sought to disallow the proportionate interest worked out at 9% per annum and accordingly arrived at the disallowance figure of Rs.10 Lakh and made addition to the assessment. The CIT (A) also upheld the order of the Assessment Officer. Aggrieved the assessee filed an appeal before the ITAT.

The Counsel for the assessee submitted a copy of the Coordinate Bench decision in the case of Shri. J.P Agarwal for the assessment tear 2010-11 wherein the addition made in the hands of the Shri J.P. Agarwal towards deemed dividend for excessive borrowings by him from the assessee company in the sum of Rs. 21 Lakh was deleted by the Tribunal by holding that funds were given to Shri J.P. Agarwal only to facilitate the company’s business and thereby proving business exigency thereon. In that decision, it was held that Shri J.P. Agarwal had permitted his properties mortgaged to the bank for enabling the assessee company to take the benefit of loan and in spite of request of Shri J.P. Agarwal, the assessee company was unable to release the properties from the mortgage.

The bench comprising of Judicial Member S.S Viswanethra Ravi and Accountant Member M. Balaganesh observed “we hold that the excess borrowings made by Shri J.P. Agarwal from the assessee company was in the normal course of business and to retain the facility of loan availed from the bank, which clearly demonstrates the business nexus of the advances made by the company to Shri J.P. Agarwal. Hence, it cannot be said that the monies advanced to Shri J.P. Agarwal were for non-business purposes. Once the money is borrowed for the purpose of business and interest is paid thereon, the same would be squarely allowable as deduction u/s 36(1)(iii) of the Act. Accordingly, the lending of monies to Shri J.P. Agarwal (Individual) and Shri J.P. Agarwal (Karta of HUF) is for the purpose of business and hence no proportionate disallowance of interest paid on borrowed capital could be made in respect of amounts advanced to these two parties.”