Interest on personal loan taken for business purpose allowed as business expenditure

Interest on personal loan taken for business purpose allowed as business expenditure. The assessee could very well attribute the interest free funds for personal purpose.

Interest on personal loan taken for business purpose

ABCAUS Case Law Citation:
ABCAUS 1223 (2017) (04) ITAT

The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax (Appeals) in confirming the order of the Assessing Officer (AO) in making disallowance of interest paid from personal Account for Business purpose treating it as out of interest free funds.

Assessment Year : 2012-13
Date/Month of Pronouncement: April, 2017

Important Case Laws Cited/relied upon:
ACIT vs. Smt. Suman Jain
A. Builders Ltd. vs. CIT(A)
ACIT vs. Tulip Star Hotels Ltd.

Brief Facts of the Case:
The Assessing Officer observed that the assessee had debited interest amount of Rs. 23,42,057/- and Rs. 31,98,922/- in its two proprietary concerns. It was further observed that the assessee in his business claimed deduction of interest of Rs. 27,63,587/- paid for acquiring personal assets which were reflected in his personal balance sheet. The Assessing Officer held such interest was not related to business purposes and could not be allowed.

Against the order of the AO, the assessee appealed before the CIT(A) and claimed that it is not easy to get loans for the proprietary concern. Therefore, the he as proprietor had taken loans in his personal name and transferred the same to the proprietary concern which can be seen from the capital account of the proprietary concern.  It was submitted that he received an interest free loan from a private limited company which went into investment in assets reflected in the personal balance sheet and the interest bearing funds had been transferred to the proprietary concern. He further submitted that the bank statement clearly reflected the loan account borrowed by the assessee in individual capacity which were transferred to proprietorship concerns. As the loans have been utilized for earning profit from business, the interest cost incurred on the said personal borrowings was integral part of earning profit in the said business and was therefore deducted u/s 36(1)(iii).

However CIT(A) observed that the interest free loan was transferred to one of his proprietorship firms. This made him to opine that the interest bearing funds had been invested in the personal assets of the appellant and therefore the interest paid on the same was not an allowable business expenditure. CIT(A) further opined that the assessee could not prove that interest bearing funds had not gone into the investments in personal assets. According to him, in the absence of any evidence, the claim of the assessee that the loans taken had been used only for business and consequently the interest paid on these loans had to be allowed as business expenditure could not be accepted.

Observations made by the Tribunal:
The Tribunal observed that the adverse inference taken by the Income Tax authorities was devoid of cogency. Assessee had raised loan and used it for business purpose. Revenue authorities could not sit into the shoes of the businessman and direct as to from where he should raise the loan.

Also the ITAT observed that the assesse had interest bearing as well as interest free funds. In the said circumstances it was the settled law that it was up to the assesse to attribute the source of investment if interest free and interest bearing funds were available. The assessee could very well attribute the interest free funds for other purpose and interest bearing funds for the business purpose. Hence adverse inference drawn by the authorities was not also sustainable on this issue.

It was observed that it was not the case of the revenue that interest free funds were not sufficient to meet the amount spent on acquisition of other assets. Hence attribution of the authorities below that interest bearing funds were not used for business purpose could not be sustained.

Held:
The order was set aside and the appeal was decided in favour of the assessee.

Interest on personal loan taken for business purpose

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