It is for assessee to decide how to utilize loan in business, Court not to substitute its opinion

It is for assessee to decide how to utilize loan in business, Court not to substitute its opinion over his view
for the investment made-High Court

ABCAUS Case Law Citation:
ABCAUS 2135 (2017) (11) HC

The Revenue had filed two appeals challenging the judgment and order of the Tribunal (ITAT) whereby tribunal had dismissed the appeal of the department and confirmed the order of the CIT(A).

The assessment was reopened by issuance of notice u/s 148 of the Income Tax Act, 1961 (the Act) by the Assessing Officer (AO). As per the reasons recorded by the AO, it was stated that the assessee company has made huge investment in two firms wherein the directors of the assessee company were also partners. It was further stated that the assessee was paying interest on unsecured loan and interest to banks on secured loan on which it was paying the interest @ 12% which is higher as compared to low rate of return on investment in the said two firms and the investments were not reasonable.

Thereafter, after disposing off the objections raised by the assessee, the reassessment was completed u/s 147 r/w section 143(3) of the Act wherein the AO held that the investment in these two firms was not part of the business of the assessee and there was no profit to the business of the assessee from such investment and the amounts so invested was not reasonable.

The AO didn’t accept the submission that the investments in the firms were not made out of borrowed funds but out of internal accruals and the investments were made in the earlier years. The AO held that had not the assessee made the said investments, it would have saved the amount of interest paid on unsecured loan and bank loan to the extent of 12% of the investment made . Accordingly he disallowed an amount equal to 12% of the said investment and added it to the income of the assessee company.

The CIT(A), in view of the order passed by the Tribunal in the case of the appellant in the past and also considering the fact that investments were made out of the interest free funds available in the business, deleted the addition.

The Hon’ble High Court opined that it was for the assessee to adjust for which purpose the loan was taken in business and being a prudent businessman, no man make a loss in the long run. The High Court opined that it ought not to substitute its opinion over view for the investment made by the assessee.

The appeals of the revenue were dismissed as not involving any substantial question of law.