Decided on September 12,2008



C.D. Rao, A.M. - (1.) THIS appeal preferred by the Revenue is directed against the order passed by the learned CIT(A)-VI Kolkata dt. 19th May, 2008 for the asst. yr. 2005-06.
(2.) In this appeal the Revenue has raised the following two grounds: (1) That the learned CIT(A) has erred in deleting the disallowance of Rs. 1,07,784 made by the AO. During the course of assessment it was observed that the assessee took an interest bearing loan of Rs. 25 lacs whereas total work in capital towards business is not more than Rs. 10 lacs. In view of this the interest attributable to Rs. 15 lacs was disallowed by the AO being not incidental to the business activities. (2) The learned CIT(A) has erred in deleting the additions of Rs. 6,65,000 made by the AO under Section 2(22)(e). It was observed by the AO that there was peak credit of Rs. 6,65,000 in the books of the assessee against loan from M/s Park Credit & (P) Ltd. against which the assessee did not paying interest to the said concern. The facts emerged from the record in respect of ground No. 1, are that while doing the scrutiny assessment the AO has observed that the assessee has debited its interest account worth Rs. 1,79,640. According to the AO, the assessee has not utilised the entire loan for the purpose of business. He was of prima facie opinion that the claim of interest not relating to the business is not allowable as deduction. On query, the assessee has submitted the following submissions: Regarding interest of Rs. 1,79,640 we have taken loan from M/s UMIL Shares & Stock Broking Services Ltd., out of the total loan taken, Rs. 10 lacs is opening balance and Rs. 15 lacs has been taken during the year. The xerox copy of loan confirmation is enclosed. Further, we want to inform you that our company was engaged in the business of mobile trading and NBFC activity, for both the activities funds are required as working capital. Therefore, the company has taken loan for the purpose of running the business of mobile trading and NBFC activity so interest debited in P&L a/c has been incurred for the purpose of business and profession. Therefore, the question of disallowance of interest of Rs. 1,79,640 does not arise. However, the AO has disallowed an amount of Rs. 1,07,784 by observing that the assessee claimed that during relevant previous year trading in mobile sets and shares was done. While verifying the business activities of the assessee, it is found that during the whole year total purchase of the assessee for mobile and shares together comes to Rs. 15,22,228 (Rs. 9,27,514 + Rs. 5,91,714) only. Going by business trend of the assessee its stock-in-trade turnover rotation and its holding in stock-in-trade at the year end, it can be safely held that not more than Rs. 10 lacs of borrowed fund was used by the assessee for business purposes. Rather, it appears that most of the investment of the assessee was going towards investment where there is no scope for any allowance of interest. As per provisions of Section 36(l)(iii) of the IT Act, 1961, interest can be allowed only on the borrowings which were taken and used for the purpose of business only and from the above discussion, it is apparent that major part of the borrowings was not used by the assessee for business purpose, hence proportionate disallowance is made to the extent it was not used for non-business purpose, which is worked out at Rs. 1,07,784 (Rs. 1,79,640/25 x 15) i.e., use of fund for non-business purpose out of a total borrowing of Rs. 25 lacs to the extent Rs. of 15 lacs.
(3.) ON appeal the learned CIT(A) has deleted the same at para 3.7 which is as under: From the above discussions and decision of Hon'ble Courts on the issue, it would be evident that in a case where there is mixed fund, no attempt should be made to bifurcate the same for the purpose of applying the provisions of Section 36(l)(iii). However, at any rate, the funds available to the assessee, other than the borrowings, were sufficient to cover the investments made. Hence, it cannot be stated that there was diversion of funds justifying the disallowance of interest payment. The AO failed to establish that the amounts invested in acquiring shares and mutual fund came only out of the borrowed fund. For the said reason, the AO is not justified in disallowing the interest payment. In view of above, the addition of Rs. 1,07,784 is hereby ordered to be deleted. Accordingly, ground No. 2 is allowed. Aggrieved by this, now the Revenue is in appeal before us.;

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