Interest Expenditure on Borrowed Funds is not allowable since Assessee deposited the same in Banks as FDs: ITAT [Read Order]

Bangalore bench of Income Tax Appellate Tribunal (ITAT) recently held that the interest expenditure on borrowed funds is not allowable under the provisions of the Income Tax Act since the same was not used for business purpose and also deposited in the banks as fixed deposits.

Assessee in the instant case, engaged in the business of manufacture and sale of beedies has duly filed its return of income in the assessment year.

During the course of assessment proceedings the Assessing Officer (AO) has found that has borrowed a huge sum of money from its directors and shareholders for business purpose and claimed deduction under section 36 (1) (iii) of the Income Tax Act 1961 in respect of interest on borrowed funds. Assessee explained that the money was borrowed for the purpose of starting a new branch in Orissa.

After the investigation and further examinations, the AO found that the assessee does not has an intention to start a new branch and also deposited the aforementioned borrowed money in bank as fixed deposits. Accordingly, he denied the claim of deduction of the assessee.

After hearing the rival submissions the Tribunal bench including Judicial Member Laliet Kumar and Accountant Member Arun Kumar Garodia observed that while considering the material facts it is clear that the assessee has borrowed funds from the directors and shareholders for a fake purpose. As per the detailed investigation report of the AO and CIT (A) it found that the same money was deposited by the assessee in bank as fixed deposits.

The division bench further observed that it is clear that the assessee had no intention to start a new branch and he does not want to utilize the borrowed money for his business purpose. Therefore, for the purpose of allowing deduction u/s.36 (1) (iii) in respect of interest on borrowed funds, it has to be looked into that the borrowed funds were used in fact for business purpose and mere intention is not sufficient to allow deduction u/s. 36(1)(iii) of Income Tax Act.