Interest on borrowing not allowable u/s. 36(1)(iii) if not used for business purpose

JCIT (Asst.) Vs. M/s. Bharath Beedi Works Ltd. (ITAT Bangalore)

Objection of the AO is that  borrowing from Directors and shareholders is not for business purpose. The AO has noted that even as per the assessee’s contention, if the assessee had an intention of starting a branch in Orissa, the same appears to have remained on paper because it has not fructified till the date of passing the assessment order. Before us also, it is not shown that it has come into existence.

The AO has also noted that additional outlay which was claimed to have been necessary for opening a branch in Orissa which was according to the assessee’s own version was around Rs. 15 to 20 crores and the assessee during the relevant period had fixed deposits of more than the said amount and therefore, there was no necessity of taking additional funds at interest at more than the market rate even if it is assumed that the assessee had an intention of opening a branch in orissa.

The AO has referred to two judgments as reported in 25 ITR 265 and 5 ITR 734 as per which the term “used for the purposes of business or profession” mean that used for the purpose of enabling the owner to carry on the business or profession and earn profits in the business or profession. 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 IT Act.

The ld. CIT(A) has also noted the details of liability side and asset side of assessee as on 31.03.1998 on page no. 10 of its order and as per the same, as against borrowing of Rs. 9.05 crores from Directors/ shareholders of assessee company as on 31.03.1997, there was fixed deposits with banks of Rs. 18.49 crores on that date against unsecured loan from Directors and Shareholders of Rs. 14.26 crores as on 31.03.1998, the fixed deposits with banks as on 31.03.1998 was to the extent of Rs. 23.10 crores.

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