November 2008
S. 37(1) — No interest held to be allowable where firm had advanced Interest free loan to a relative of a partner for purchase of a flat.
By Jagdish D. Shah, Jagdish T. Punjabi, Chartered Accountants
Reading Time 3 mins
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9 DCIT v. Parthas Power House
ITAT Cochin Bench
Before N. Barathwaja Sankar (AM) and N. Vijayakumaran (JM)
ITA No. 50 & 51/Coch./2007
A.Ys. : 2003-04 & 2004-05. Decided on : 12-6-2008
Counsel for revenue/assessee : T. R. Indira/
R. Srinivasan
S. 37(1) of the Income-tax Act, 1961 — Business expenditure —
Interest-free loan to a relative of a partner for purchase of a flat — The flat
used for the purpose of the business of the assessee — Whether AO justified in
disallowing interest paid by the assessee — Held, No.
Per N. Barathwaja Sankar :
Facts :
One of the issues before the Tribunal was regarding the
allowability of interest paid by the assessee. During the years under appeal,
the assessee had paid the sum of Rs.25.23 lacs to a builder towards the cost of
a flat purchased by the wife of the partner. In addition the assessee had also
paid interest of Rs.15.53 lacs on behalf of the said person to HDFC for the loan
received by her for the said flat. According to the AO, the assessee to the
extent of the said advances had diverted its fund for non-business purpose.
Therefore, he disallowed interest amount equal to the sum computed @ 14% of the
said advance. On appeal, the CIT(A) deleted the additions made by the AO.
Held :
The Tribunal noted the following facts considered by the
CIT(A) :
à
The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;
à
No rent was paid by the assessee for the use of the flat;
à
The assessee had substantial amount of interest-free funds during both the
years under appeal;
à
The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.
In view of the above, the Tribunal upheld the order of the
CIT(A).
(iii) In the case of SCM Creation, which was the intervener
in the case of Rogini Garments before the Special Bench of Chennai Tribunal,
the Madras High Court relying on its own decision in the case of V.
Chinnapandi, had allowed the appeal filed by the assessee;
(iv) The Bombay High Court in the case of Nima Specific
Family Trust, which decision was again based on the decision of the M. P. High
Court in the case of J. P. Tobacco Products Pvt. Ltd., had held that both the
Sections were independent and hence, deduction could be claimed on the gross
total income, subject to ceiling of 100%.
Cases referred to :
1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);
2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);
3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);
4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);
5. Nima Specific Family Trust, 248 ITR 291 (Bom.)
6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)
