INCOME TAX ACT, 1961

Section 36(1)(iii) Section 41(1)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Payment of interest claimed to be paid on alleged interest-free loans - Burden of proof as to loans utilized for business purpose not discharged by assessee

Assessee was an individual and engaged in the multiple businesses such as real estate, financing and share trading, etc. The assessee was also a partner in a firm namely M/s. Master Developers (MD). Assessee during the years had claimed interest expenses on secured loan from the bank and on unsecured loan from the parties. AO was of the view that the amount borrowed by the assessee had not been utilized for the purpose of the business. Thus the AO disallowed the amount of interest expenses claimed by the assessee and added to the total income of the assessee. Assessee before the CIT(A) submitted that it had interest-free loan of Rs. 7,80,00,000. The assessee claimed that the amount of tax was paid out of such interest-free loan. Accordingly the assessee claimed that there cannot be any disallowance on account of interest expenses. However, the CIT(A) disagreed with the contention of the assessee and, therefore, confirmed the order of the AO by observing that assessee had not corroborated with documentary evidences his claim that interest bearing funds were not used to pay his income tax dues, and that the same were paid out of his interest free funds. Held: Admittedly, the onus lies on the assessee to justify based on documentary evidence that the interest expenses was incurred on the money borrowed from the bank and other parties for the purpose of the business. But the assessee, in the present case has failed to do so. It was also pertinent to note that the assessee claimed to have received interest-free loan of Rs. 7,45,00,000 from M/s. Master developers in the submission made before the CIT(A). However, the assessee to establish the genuineness of loan of Rs. 7,45,00,000 from M/s. Master Developers (MD) had contended before the CIT(A) that it has paid interest on the money borrowed from MD. Thus, it was transpired that the assessee had made contradictory sumissions before the CIT(A) and had not furnished the required details of the interest expenses to justify that the interest cost was incurred in the course of the business. Thus, in the absence of sufficient documentary evidence about the interest expenses on the borrowed fund whether the same was utilized for the purpose of business, therefore, was no reason to interfere in the order of the authorities below.

REFERRED :

FAVOUR : Against the assessee.

A.Y. : 2011-12

INCOME TAX ACT, 1961

Section 68

SUBSCRIBE FOR FULL CONTENT