Gujarat H.C : The borrowed funds were utilised by the assessee for non-business purpose and whether the finding of the Appellate Tribunal is perverse to this extent

High Court Of Gujarat

CIT vs. Kajal Exports

Assessment Years : 2003-04 And 2004-05

Section : 36(1)(iii)

Akil Kureshi And Ms. Sonia Gokani, JJ.

Tax Appeal Nos. 756 & 757 Of 2013

January 23, 2014


Ms. Sonia Gokani, J. – Both the tax appeals (for the assessment year 2003-04 and the assessment year 2004-05) essentially concern identical question of fact and law and, hence, are decided by a common order. The facts and other details are taken for the purpose of adjudication from Tax Appeal No. 756 of 2013.

2. Following is the substantial question of law raised for our consideration by the Revenue in Tax Appeal No. 756 of 2013 challenging the order of the Income-tax Appellate Tribunal (“the Tribunal” for short) dated April 18, 2013 :

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in deleting the addition of interest of Rs. 87,35,694 by totally ignoring the facts that the borrowed funds were utilised by the assessee for non-business purpose and whether the finding of the Appellate Tribunal is perverse to this extent ?”

3. We have heard learned counsel Shri Manish Bhatt for the Revenue and Shri Bandish Soparkar for the assessee-respondent in both the matters.

4. The question pertains to the deletion of the addition of interest of Rs. 87,35,694 in the following factual background.

5. The Assessing Officer noted that the assessee had borrowed the amount throughout the year under the banner of business necessity and also noted the purchases and the sales patterns of the assessee and held that the funds borrowed were utilised for purposes other than business. It further noted that the assessee had advanced money to the close relatives/sister concerns without charging interest. Accordingly, the Assessing Officer disallowed the expenditure.

6. When challenged before the Commissioner of Income-tax (Appeals), it concluded that the borrowed funds were not used for the business purposes in the year 2003-04 and the Assessing Officer was justified in disallowing the expenditure on such borrowed funds to the extent it is claimed in the profit and loss account.

7. Aggrieved the Department carried the same before the Tribunal which deleted the entire amount except Rs. 21,900, i.e., 15 per cent. of Rs. 1.46 lakhs and, hence, these appeals.

8. We could notice from the detailed examination conducted by both the Commissioner of Income-tax (Appeals) and the Tribunal that this aspect could be bifurcated this wise : (i) non-use of borrowed funds for business, (ii) interest-free advances given to the partners.

9. On the first aspect, the Tribunal after having examined in detail the pattern of investment, loans and advances as also considering the fixed assets and cash noted that there was no fresh borrowing in the year under consideration and already borrowed funds had reduced from Rs. 1,953 lakhs to Rs. 1,239 lakhs. This substantial reduction led the Tribunal to note that it would not be possible to hold that the borrowed funds were not used for business purpose merely because the investment, loans and advances given to the partners and the debit balance of the partners’ capital account had gone up.

10. The assessee had advanced loan of Rs. 540.97 lakhs to the partners and relatives, associate concerns and others, and on such loan to the extent of Rs. 446.92 lakhs, interest was charged by the assessee. This interest-free loan available to the assessee was to the tune of Rs. 97.26 lakhs. Out of the total unsecured loans available with the assessee in respect of a sum of Rs. 34.84 lakhs from Design Solutions Ltd. and Rs. 60.97 lakhs from Sthapatya Consultancy, making total of Rs. 95.80 lakhs, no interest had been paid by the assessee in respect of such loans. Such interest-free borrowed funds were available with the assessee.

11. We could also notice that with respect to the interest-free advances made available to the partners, the Tribunal has rightly held that Rs. 97.26 lakhs interest-free advance were made whereas the assessee had interest-free fund to the tune of Rs. 95.80 lakhs available with it and, therefore, only for the remaining sum of Rs. 1.46 lakhs, it had confirmed the disallowance of the interest.

12. On both the aspects, based on the materials available when the Tribunal has appropriately held in favour of the assessee, noting the availability of interest-free funds, as also with regard to the utilisation of funds available with the assessee, for the business purpose, we do not see any reason to interfere in the reasonings in the absence of any perversity. In the absence of any fresh borrowings in the assessment year 2003-04, reduction of borrowed funds could not be assumed to be for non-business purpose with corresponding advances to the partners in the wake of appreciation of entire gamut of facts and details presented before the Revenue authorities and thus the Revenue not having raised any substantial question of law in this regard, the tax appeals, resultantly, are dismissed.

[Citation : 362 ITR 328]