Disallowance of interest for drawings out of cash credit account deleted as closing balance of capital was more than opening balance

Disallowance of interest for drawings out of cash credit account deleted as despite drawings closing balance of capital was more than opening balance

ABCAUS Case Law Citation:
ABCAUS 1217 (2017) (04) ITAT

The Grievance:
The appellant assessee was aggrieved by the order of the Commissioner of Income Tax (Appeals) in confirming the order of the Assessing Officer (AO) making disallowance of interest paid on cash credit for drawings made for personal use.

Assessment Year : 2010-11
Date/Month of Pronouncement: April, 2017

Important Case Laws Cited/relied upon:
CIT vs. Hotel Savera

Brief Facts of the Case:
During the course of assessment proceedings, the AO noted that assessee had constructed a house for her own use. As per Assessing Officer a sum of Rs. 1,28,32,350/- was utilized by the assessee for the construction of residence by way of drawings sums from the cash credit account. It was also noticed that interest paid on the above cash credit account was charged to the profit and loss account of the business.

The AO was of the opinion that asset acquired out of the loan was a personal one, and interest claimed as business expenditure could not be allowed. The assessee explained that there was enough capital available in the business and the drawings of the money from the business never exceeded such capital. Thus, the presumption taken regarding borrowed capital being used for the purpose of meeting construction cost was incorrect.

However, the above explanation was not accepted by the AO and he made  disallowance for so interest charged on the said cash credit account with the bank.

Assessee’s appeal before Commissioner of Income Tax (Appeals) was not successful. According to CIT(A), there was a direct nexus between borrowed fund and investment made in residential house.

Observations made by the Tribunal:
It was observed that the Revenue did not dispute that assessee in her proprietorship business had an opening capital of Rs. 4,09,72,141/- and the  Closing capital was to Rs. 4,43,10,486/-. In other words, despite the drawings by assessee from the proprietorship concern, her closing credit balance had gone up substantially. This by itself was indicative that there was no diversion of interest bearing funds.

The Tribunal observed that in the case of Hotel Savera, the Hon’ble High Court held that when there were sufficient funds with an assessee to cover the advances, even after debiting the drawings and the loss, a presumption would arise that the drawings were out of own funds.

The ITAT opined that when the assessee had more than Rupees four crores in credit balance in her capital account which was not interest bearing, a part withdrawal of such capital, cannot be considered as drawings made out of loans taken during the relevant previous year. As held by the Lordship in the case of Hotel Savera principle of probability is not a universal rule that can be applied bereft of corroborating facts.

Held:
It was held that the disallowance was not justified. The disallowance was deleted.