Business deduction under section 36(1)(iii)—Interest on borrowed capital—Money advanced to piece workers who did no work during the year—Assessee having sufficient interest free funds

short Overview: Where assessee had sufficient interest-free funds, which were much higher than the advances made by it, no interest bearing funds were utilized by the assessee for such purpose and hence, no disallowance of interest could be made.

AO disallowed deduction of interest expenditure on ground that assessee diverted interest bearing funds for non-business purposes. AO observed that assessee had outstanding balance is ledger accounts of piece workers which remained unchanged throughout the year. AO held that there workers did not provide any services and assessee advanced huge sum them.

It is held that: Since assessee had sufficient interest free funds, which were much higher than the advances made by it, no interest bearing funds were utilized by the assessee for such purpose and hence, no disallowance of interest could be made.

Decision: In assessee’s favour.

IN THE BOMBAY HIGH COURT

AKIL KURESHI & S.J. KATHAWALLA, JJ.

Pr. CIT v. B.T. Patil & Sons Belgaum Construction (P) Ltd.

Income Tax Appeal No. 471 of 2017 with Income Tax Appeal No. 650 & 663 of 2017

18 June, 2019

Appellant by: N.N. Singh

Respondent by: S.R. Mody a/w Aasifa Khan

P.C.

Heard.

2. The appeals are admitted for consideration of following substantial question of law :–

“Whether the respondent-assessee fulfills the requirement stipulated in section 80-IA(4) of the Income Tax Act, 1961 once the conclusion reached is that it is contractor and not developer as stated in the sub-section?”

3. We notice that the Revenue has suggested additional question which reads as under :–

“Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not upholding proportionate disallowance of interest on diversion and advance of funds for non-business purposes and investment in non-business activities without appreciating that all the funds are in common hotchpotch and it cannot be distinguished/proved whether such advances are out of own funds or out of interest bearing borrowed funds?”

4. In so far this question is concerned, the assessing officer had disallowed the deduction of interest expenditure on the ground that the assessee had diverted interest bearing funds for non-business purposes. The assessee had outstanding balance shown in the ledger accounts of the piece workers which remained unchanged through out the year. According to the assessing officer, this would show that no work was carried out by these parties. The assessee had shown to have advanced sizable amount to this so called piece workers. The assessing officer was of the opinion that this was diversion of assessee’s funds which were otherwise interest bearing on which the assessee would have claimed interest expenditure.

5. Before the Commissioner (Appeals), however, the assessee supplied a statement showing the amount paid, bills adjusted and the balance payable in respect of sub-contractors for whom the job workers were doing the work. The Commissioner (Appeals) accepted such explanation and deleted disallowance. Revenue carried the matter in appeal. The Tribunal dismissed the Revenue’s appeal inter alia accepting Commissioner (Appeals)’s observation that the assessee had his own sufficient interest free funds which were much higher than the advances made by the assessee. Thus, no interest bearing funds were utilized by the assessee for such purpose. Essentially, this is a question of facts concurrently held by the Commissioner (Appeals) as well as Tribunal in favour of the assessee. No question of law arises in this respect.

6. Learned counsel for the Revenue, however, relied on a decisions of Punjab and Haryana High Court in the case of M/s. Avon Cycles Ltd., Ludhiana v. CIT, Ludhiana & Anr. 2014 SCC Online P&H 15704 and the decision of the Supreme Court in the case of Maxopp Investement Ltd. v. CIT, New Delhi (2018) 15 SCC 523 : 2018 TaxPub(DT) 1403 (SC). In case of M/s. Avon Cycles Ltd. (supra), it was the assessee who was in the appeal before the High Court. The Commissioner (Appeals) and the Tribunal having ruled against the assessee, the High Court dismissed the appeal. The issue was thus decided on the facts emerging from the record. In case of Maxopp Investment Ltd. (supra), we do not see any applicability of the ratio laid down herein to the facts of our case.

7. Admission of the Appeal is therefore confined to sole question framed earlier. To be heard along with Income Tax Appeal No. 292 of 2017.

8. The Registry is directed to communicate copy of this order to the Tribunal. This would enable the Tribunal to keep papers and the proceedings relating to the present appeal available, to be produced when sought for by the Court.