In Dheeraj Consultancy P. Ltd v. ACIT, the Mumbai ITAT held that the finance cost incurred on overdraft obtained from the bank which is advanced to sister concern for the non-business purpose is not business loss under the Income Tax Act.
The assessee, in the instant case, is in the business of Advertising Agency has incurred finance cost amounting to Rs.1,37,08,749/- as interest on Bank Overdraft. The AO asked the reason to assessee that why such finance cost should be allowed as business expenses if there is no business carried on by the assessee during the assessment year.
In reply assessee submitted that the cost incurred on overdraft is solely for the purpose of business of the Assessee Company as the Assessee Company has used the overdraft facility for making advance payment for the purchase of business assets and hence the same should be allowed as deduction.
AO disallowed the same by finding that the said expense cannot be allowed as business expenses as there is no business activity during the year. CIT (A) rejected the matter of assessee and held that aforesaid interest expenditure of Rs.l,37,08,749/- had been incurred out of commercial expediency.
Further, aggrieved with the appellate order assessee carried the matter before the tribunal and submitted that disallowance of interest has been made u/s. 36(1)(iii) by the authorities below as the assessee could not prove that the said interest expenses were incurred for the purpose of business of the assessee.
The assessee also submitted the record of MOA to justify that the real estate business is part of the business activities of the assessee.
It was observed that assessee has claimed by virtue of clause B (5) which are objects incidental and ancillary to the main object clause that the assessee is entitled to carry out real estate business.
The tribunal had an opinion that the assessee has miserably failed that to prove its contention that the said loans were used for business purposes by the assessee and mandate of Section 36(1)(iii) was complied with.
Finally, ITAT observed that “the payments and the return thereof of the said advances are from the sister concerns and in the absence thereof of the evidence on record to substantiate that these were business expenses and they are afraid to claim of the assessee to allow interest expenses on bank overdraft to the tune of Rs.1,37,08,749/- as business expenses cannot be accepted and hence the appeal of the assessee is dismissed.”
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