Disallowance us 361iii for bank interest on unutilized loan. If satisfied that loan was for business, no addition required for unutilized part at year end

Disallowance us 361iii for bank interest on unutilized loan

In a recent judgment, ITAT held that once the Assessing Officer satisfied with the nature of loan being of business in nature then no disallowance u/s 36(1)(iii) was called just for keeping the funds unutilized at the end of the year. 

ABCAUS Case Law Citation:
945 2016 (06) ITAT
Date of Judgement/Order: June 2016

Brief Facts of the Case:
During the course of assessment proceedings the Assessing Officer (AO) observed that the appellant assessee had claimed business bank loan interest of Rs.2,49,136/- in sole proprietary concern. However the loan was taken by the assessee by mortgaging immovable property owned by sole proprietary concern but bank gave loan to the partnership firm of which assessee was also a partner. The AO further observed that out of the total loan of Rs.30,00,000/- only Rs.14,07,514/- was utilized by the assessee in business and the balance amount of Rs.15,92,486/- remained unutilized. The assessee explained  that the bank needed three years financial data for granting of business loan and as the sole proprietary concern was just an year old, in the interest of business, financial statement of past three years of the partnership firm were given to the bank. Accordingly the AO calculated interest attributable to the unutilized part of the loan at Rs.1,32,497/- and disallowed it u/s 36(1)(iii) of the Income Tax Act, 1961 treating it being not used for business purposes. 

In appellate proceedings before CIT(A) the addition was confirmed on the ground that the assessee could not establish that the entire loan was sanctioned to the assessee and not to the firm and also only a part of the loan sanctioned was utilized by the assessee in the business.

Treatment of loan in the books of Proprietary and Partnership Firms:

The secured loan was shown in the balance sheet of the proprietary concern of the assessee at Rs.  Rs.27,05,153/- and the sum of Rs.30,00,000/- was adjusted in the business account of partnership firm and closing debit balance partnership firm in the books of account of proprietary concern was shown at Rs.15,92,486/-. Interest expenditure on the loan was claimed by the assessee in sole proprietorship concern and not by partnership firm.

ITAT Observations:

The AO has allowed proportionate interest at Rs.1,16,639/- accepting it as a business loan of the proprietary concern and has also not controverted to the fact that both the assessee and the partnership firm are being assessed to tax rate at maximum marginal rate i.e. 30% and there would have been no effect on the revenue if this interest has been claimed by the partnership firm or the sole proprietary concern.

The only reason for which Assessing Officer had disallowed the interest that part of the loan amount remained unutilized but AO had duly accepted the transaction of the loan amount being shown in the proprietary concern and not in the partnership firm. In other words, the revenue had not objected that the loan which was initially transferred in the account of partndership firm was shown as loan in the proprietary concern.

Important Excerpts from ITAT Judgment:

We further observe that the loan amount of Rs.30 lakhs was not cash credit limit which is normally used as and when need arises, but it is a mortgage loan taken for business purpose and the complete loan amount is transferred to the borrower’s account and interest is charged from the date of sanction of loan. Here we would like to mention that business loan is taken by assessee with the plan to utilize the loan amount prudently and in the best interest of business as well as the assessee. One cannot deny the situation that the assessee may not be able to utilize the amount of loan immediately and may have to wait for a right time to use the same as a single wrong action may lead him to lose the borrowed money. In view of our above discussion, we are of the view that ld. Assessing Officer once satisfied with the nature of loan being of business in nature then no disallowance was called just for keeping the funds unutilized at the end of the year because the business money keeps rotating and assessee was at liberty to wait for using the same at appropriate point of time for business purposes. Therefore, we allow the ground of assessee by deleting the disallowance of Rs.1,32,496/- on account of bank interest.