Diversion of Borrowed Fund for non-business purposes: ITAT upholds  Disallowance of Excess Interest

In a recent judgement, the Pune bench of the Income Tax Appellate Tribunal (ITAT)upheld the disallowance of excess interest on borrowed funds since the assessee diverted the fund for non-business purposes.

Asuda Holdings Private Limited, the assessee challenged the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A)] for the A.Y.2014-15. The assessee has taken a loan from M/s. Elevators News Network Pvt. Ltd. (ENNPL) paid interest @18%.

The assessee has given a huge loan to one of its directors Mr. Anup Shyam Karnani and charged the interest @13.5%.  The Assessing Officer(AO) rejected the submission by the assessee and observed that the assessee has lent the amount to one of its Directors with little interest, which proves that the funds borrowed have direct nexus between the borrowing of the funds and diversion thereof for non-business purposes.

The AO invoked provisions of section 36(1)(iii) of the Income Tax Act, 1961 to disallow the difference interest @4.5% and disallowed the same to the extent of ₹.48,11,168/- and calculated the amount. On appeal, the CIT(A) dismissed the ground raised by the assessee and upheld the findings of AO.

It was contended by the assessee that they are in the business of money lending and submitted copies of the memorandum of association and highlighted the object clause of the company.Further, he submitted that the assessee has lent the money to one of the directors with a lesser interest.

The purpose of the lending business assessee has taken the loan and also gave the loan during the year and accepted that there is a difference in charging the interest with the difference of 4.5% which was given to one of the Directors. Further, argued that the interest payment made to ENNPL which the company has declared the same in its return of income.  Therefore, income is already charged to tax. 

A two-member bench comprising of Shri Kuldip Singh, (Judicial) and Shri S Rifaur Rahman, (Accountant) observed that the assessee has borrowed funds @18% without there being any other funds shows that the assessee utilized interest-bearing funds to lend the money to one of its Director with a considerable difference of interest rate i.e., 4.5% which shows that there is a diversion of funds for a non-business purpose.  The ITAT upheld the findings of CIT(A) and dismissed the appeal filed by the assessee.

To Read the full text of the Order CLICK HERE

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