Case Law Details
Borkar Packaging Pvt. Ltd. Vs ACIT (ITAT Panaji)
The Income Tax Appellate Tribunal (ITAT) Panaji recently delivered a significant decision in the case of Borkar Packaging Pvt. Ltd. vs. ACIT concerning the disallowance of interest on borrowed funds. The central issue revolved around whether the nature of the loan determines the character of interest for disallowance, specifically under the proviso to Section 36(1)(iii) of the Income Tax Act, 1961. This article provides a detailed analysis of the case, examining the arguments, the tribunal’s reasoning, and the implications of the decision.
Background: Borkar Packaging Pvt. Ltd., a company engaged in the business of manufacturing Paper Board Cartons, challenged the disallowance of interest amounting to ₹8,72,277 for the Assessment Years 2013-14 and 2014-15. The Assessing Officer disallowed the interest on borrowed funds used for Capital Work-in-Progress (C-WIP) under the proviso to Section 36(1)(iii) of the Act, asserting that 70% of the total addition to C-WIP was funded by general borrowings.
Appellant’s Arguments: The appellant contended that there were no specific borrowings for the acquisition or creation of new assets. They argued that in the absence of a direct nexus between general capital borrowed and the addition made to C-WIP, the disallowance was not justified. The appellant emphasized that the nature of the expenditure incurred in raising a loan should not depend on the purpose at the time of raising the loan but on the actual usage of the borrowed funds.
ITAT’s Analysis and Decision: The ITAT upheld the disallowance of interest, relying on the proviso to Section 36(1)(iii) of the Act. The tribunal rejected the appellant’s argument that the nature of borrowing, whether term loan or cash credit, and whether general or specific, should not determine the character of interest for disallowance. Instead, the ITAT emphasized that the critical factor was the usage of the borrowed funds, irrespective of their type or nature.
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