The ITAT, Raipur in the case of DCIT v. Sardar Baldeo Singh Bhatia, held that the interest expenditure cannot be disallowed by the Assessing Authority without proving the nexus between borrowed funds and its utilisation for non-business purposes.
In the instant case, the AO disallowed the assesses claim for interest expenditure on ground that the interest bearing funds were used for non-business purposes.
The assessee successfully appealed the order before the first appellate authority. The CIT(A) limited the disallowance to 3 lakhs by holding that only Rs.1.94 crores have been utilised for non –business purposes by the assessee.
The bench noticed that the balance sheet drawn by the assessee reflects the transaction of the assessee at a particular date i.e. 31.3.2010 and not the transaction on the date the borrowed funds were utilised for non-business purposes by the assessee. It is the position on the date when the funds were invested in non-interest earning loans and advances and deposits, it has to be seen whether it was out of the own funds or from interest free unsecured loans of the assessee or not.
While restoring the matter back to the file of the assessing authority on the departmental appeal, the ebnch observed that without proving the nexus between the borrowed funds and its utilisation for non-business purposes, no disallowance of interest expenditure can be made.
Read the full text of the Order below.
