ACIT Vs Ms. Mini Muthoottu Credit India (P) Ltd. (ITAT Cochin)
It is established clearly that the assessee used the borrowed funds for the purchase of agricultural land. The Assessing Officer has considered the proportionate interest funds used for the purchase of agricultural land and considered only Rs.90,73,279/- out of the total interest paid of Rs.1,39,31,775/-. Being so, there cannot be further allowance of any relief to the assessee. In other words, merely because the assessee did not earn agricultural income to the extent of disallowance of interest, disallowance cannot be reduced. It is not hard and fast rule that on each and every investment in exempted yielding asset, the assessee would earn income equivalent to the interest income. Earning of exempted income is not certain because it depends on various factors. The established facts are that the assessee used the borrowed funds for the purpose of acquisition of agricultural land and not for the purpose of business. Therefore, once the income is exempted u/s. 10(1) of the I.T. Act, the said income is directly related to the investment made in the agricultural land, it is not possible to accept the alternative contention of the Ld. AR that part of the interest may be disallowed out of the total disallowance made by the Assessing Officer. This contention of the Ld. AR is also rejected.
Further, there is no merit in the findings of the CIT(A) that the provisions of section 36(1)(iii) of the Act does not have clause of “put to use”. As per this section, interest expenditure could be allowed only if the loan was borrowed for the purpose of the business of the assessee and if it is used for the purchase of an asset which yielded exempted income, that interest expenditure cannot be allowed u/s. 36(1)(iii) of the Act.
FULL TEXT OF THE ITAT ORDER
This appeal filed by the Revenue is directed against the order passed u/s. 250 of the Act by the CIT(A), Kottayam dated 12/03/2018 and pertains to the assessment year 2012-13.
2. The facts of the issue are that the Assessing Officer disallowed interest expenditure disallowance of Rs.90,73,279/-by observing that as per the balance sheet, liability towards long term borrowings is Rs.9,09,56,368/- as on 31/03/2012 and the corresponding figure as on 31/03/2011 was Rs.8,25,10,213/-. The Assessing Officer observed that an amount of Rs.1,40,49,375/- was debited towards interest on loans and interest bearing funds were utilized for purchasing land valuing Rs.5,91,52,500/-. According to the Assessing Officer, the asset was not put to use for the purpose of the business, as such, it was not clear as to how the business of providing asset management solutions to individuals and financial institutions would require investment in land to the extent of Rs.5.91 crore. The Assessing Officer observed that funds for investment in land were channled from the business and the costs of the same was debited to the P&L which would justify a proportional disallowance of interest expenses to account for purchase of land.
3. On appeal, the CIT(A) observed that u/s. 36(1)(iii) of the Act, interest on capital borrowed for the purpose of business is an allowable deduction and there is no clause of put to use u/s. 36(1)(iii) of the Act. The CIT(A) observed that the land was shown as a business asset under balance sheet and therefore, there was no diversion of funds by the assessee which calls for proportionate disallowance. According to the CIT(A), it is not for the Assessing Officer to determine how much investment the assessee should make in land for the purpose of assessee’s business. It was stated that business interest was well understood by the assessee and the Assessing Officer cannot step into the shoes of the businessman so as to determine how the business is to be conducted. In view of the above, the CIT(A) held that there was no merit in the addition of Rs.90,73,279/- made by the Assessing Officer and deleted the same.
4. Against this, the Revenue is in appeal before us. The Ld. DR submitted that objective and actual business of assessee over the years was to provide asset management service to various customers directly from customer’s data available in various branches of Muthuttu Mini Group of Companies and the purchase of land from interest bearing funds was not for the purpose of business of the assessee but for the purposes of cultivation of tapioca, which is exempt being agricultural income. It was submitted that once the income from cultivation of tapioca was claimed as agricultural income and exempt from income-tax, any expenditure attributable to such exempt income was not allowable/deductible from the taxable income of the assessee. It was submitted that the land had no role to play in the business of the company, i.e., providing asset management solution to individuals and institutions and the total cost of land covered 71% of the interest bearing long term borrowing funds.
5. On the other hand, the Ld. AR submitted that the assessee acquired land for business purpose and Revenue was increased by Rs. 2,14,67,528/- (321%). It was submitted that increase in income was achieved by deploying of land, manpower, introduction of more working capital, strategic plans, better efforts, hard work etc. and it was not a gift received, which is achieved by utilization of resources in an efficient manner. According to the Ld. AR, interest expenses were incurred to earn the incremental revenue and the assessee had not used any borrowed funds for earning exempt income. It was submitted that the total investment in Land was amounting to Rs. 5,91,52,500/- and revenue Generated from these land was Rs. 2,81,64,759/- and percentage of Revenue to land was 48%. It was submitted that during the current financial year itself half of the investment was recovered through revenue and the assessee had earned Net Profit of Rs. 70,93,922.27/- even after incurring finance cost of Rs. 1,41,66,974.93/-. It was submitted that the assessee had achieved a better Net Profit Ratio of 25% during the current year against 10% in the preceding financial year and tax Expenses increased by Rs. 39,75,887/- during the current financial year which clearly proves that the assessee had paid more Income Tax during the year. It was submitted that there was no defraud revenue and Income Tax Department got more tax during the financial year. It was submitted that it was clearly evident from the above records that the Borrowings funds were used for earning business income.
5.1 The Ld. AR tabulated the financial results as follows:
