Disallowance of Interest Expenditure Deleted as AO Failed to Prove

Disallowance of Interest Expenditure Deleted as AO Failed to Prove Business Funds Were Diverted for Personal Home Loans

Issue

Whether the disallowance of interest expenditure under Section 37(1) was justified when the accounts furnished by the assessee did not indicate that the interest claimed in the Profit and Loss account included any interest paid on personal home loans or non-business property investments.

Facts

Business Activities: The assessee was engaged in the business of manufacturing, trading, and exporting woolen carpets for Assessment Year 2016–17.
Credit Facilities: The assessee maintained bank credit limits for its business operations and paid interest on the utilized limits.
Property Purchase: During the year, the assessee made investments to acquire properties and took a home loan from a bank to purchase flats.
Interest Expenditure Claimed: The assessee claimed a certain amount of interest expenditure in its Profit and Loss account.
Disallowance by Assessing Officer: The Assessing Officer disallowed the interest expenditure on the ground that the assessee had diverted business funds for non-business purposes.

Decision

Absence of Linkage in Accounts: It was held that nothing in the accounts submitted by the assessee showed that the interest expenditure claimed in the Profit and Loss account included interest paid on personal home loans.
Disallowance Deleted: Consequently, the impugned disallowance of interest expenditure made by the Assessing Officer was directed to be deleted, deciding the issue in favor of the assessee.

Key Takeaways

Burden of Proof: The Assessing Officer cannot disallow business interest expenditure based on mere assumptions of fund diversion without concrete evidence establishing that personal interest was claimed in the Profit and Loss account.
Separation of Borrowings: Interest incurred on legitimate business credit facilities remains deductible under Section 37(1), provided it is not intermingled with personal home loan interest.
Evidentiary Basis: Any disallowance for non-business diversion must be directly supported by the financial statements and accounts furnished by the assessee.

IN THE ITAT DELHI BENCH “SMC”

Pankaj Shukla

Income-tax Officer

Vikas Awasthy, Judicial Member

IT APPEAL No.1818 (DELHI) OF 2024
[Assessment year 2016-17]

JUNE 6, 2025

Navin C. Agrawal, Chartered Accountant for the Appellant. Om Prakash, Sr. DR for the Respondent.

ORDER

Vikas Awasthy, Judicial Member.- This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeal)-2, Gurgaon (hereinafter referred to as ‘the CIT(A)’) dated 30.10.2019, for assessment year 2016-17.

2. Shri Navin C. Agrawal, appearing on behalf of the assessee submits that the solitary issue raised by the assessee in appeal is with regard to disallowance of interest expenditure Rs.3,11,520/-.

2.1. Narrating facts of the case, he submitted that the assessee is engaged in the business of manufacturing, trading and export of woolen carpets. The assessee enjoys credit limit from the bank and paid interest on credit against the limits. During the period relevant to assessment year under appeal, the assessee made investments for acquiring following properties:-

(i) Payment for purchase of flat to Lilac Infracon P. Ltd.; &

(ii) Payment of advance for booking flat with Panorma.

The ld. Counsel submitted that, as regards payment to Lilac Infracon Pvt. Ltd. Home Loan Rs. 1,14,51,369.40 was obtained by the assessee from ICICI Bank and payment of Rs. 83,65,852,00 was made out of the ICICI Loan Account. Interest accrued on Home Loan amounting to Rs.85,517.40 was also debited to party account. Thus, the interest on Home Loan account was not debited to Interest Account claimed in Profit and Loss Account. Besides Rs. 30,00,000.00 were paid out of own funds. With respect to payment to Panorama, Mumbai he stated that Rs. 27,36,000.00 was paid as booking advance for a flat at Mumbai. Money was paid out of own fund.

2.2. The AO has erred in holding held that interest expenditure of Rs.3,11,520/-debited to P&L account is not allowable expenditure as the investments are for non business purposes. Aggrieved by the assessment order dated 21.11.2018 passed u/s. 143(3) of the Income Tax Act, 1961(hereinafter referred to as ‘the Act’), the assessee filed appeal before the CIT(A). The CIT(A) without appreciating facts of the case confirmed the disallowance. He contended that the assessee had paid Rs.27,36,00,000/- as booking advance for Panorma flat at Mumbai. The money was paid through Bank of Baroda out of own funds. Likewise, investment in Lilac Infracon P. Ltd. Rs.1,14,51,369.40/- was made from the following sources:-

(i)	Own funds from Bank of Baroda	30,00,0000.00
(ii)	Housing loan from ICICI Bank	83,65,852.00
(iii)	Interest charged by ICICI Bank on the loan	85,517.40
		1,14,51,369.40

The interest on above housing loan has not been charged to P&L account. This fact was repeatedly brought to the notice of AO during assessment proceedings on 01.03.2018, 16.07.2018 and 12.10.2018. However, the AO erred in disallowing interest expenditure on the premise that the assessee has debited interest expenditure in respect of above mentioned properties in the P&L account. The bank interest charged to P&L account Rs.1,04,33,985.96/- is with respect to credit facilities utilized wholly and exclusively for the business purposes. He referred to Schedule ‘O’ of Bank Interest and Charges reflected at page 17 of the paper book and the Ledger Account at page 18 of the paper book. Both the authorities below have failed to record the facts correctly. He thus prayed for deleting disallowance made on account of interest expenditure.

3. Shri Om Prakash, representing the department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. The ld. DR submits that the interest expenditure disallowed by the AO and confirmed by the CIT(A) is unrelated to the business of the assessee, hence, the same was disallowed.

4. Both sides heard, orders of the authorities below examined. The short issue for consideration before the Tribunal is with regard to disallowance of expenditure Rs.3,11,520/-. The AO has disallowed aforesaid interest expenditure holding that the assessee has diverted funds for non business purposes.

5. The stand of assessee is that the interest expenditure claimed in P&L account is exclusively for the purpose of business. In so far as interest expenditure towards investment in Panorama and Lilac Infracon P. Ltd. the same are not debited to P&L account. In support of his submissions the assessee has also referred to bank interest ledger account at page 18 to 20 of the paper book. A perusal of ledger account reveals that the interest expenditure of Rs.1,04,33,985/- as claimed in the P&L account is also reflected in the ledger account. The interest expenditure reflected in the ledger is in respect of three accounts as under:-

Bank of Baroda CC A/c No. 26300500000022	Rs.1,03,50,166/-
Bank of Baroda A/c No. 43600600000011	Rs.51,983/-
Bank of Baroda A/c No. 26300600001024	Rs.35,569/-
	Rs. 1,04,37,718/-

Whereas, the assessee has taken Home Loan for purchase of flats at Panorama and Lilac Infracon P. Ltd. from ICICI Bank Ltd.

6. It is not emanating from the accounts furnished by the assessee that the interest expenditure claimed in P&L account includes interest paid to ICICI Bank Ltd. I find merit in the submissions of the assessee, hence, disallowance of interest expenditure Rs.3,11,520/- is deleted.

7. In the result, impugned order is set aside and appeal of the assessee is allowed.