Brahmaputra Finlease Pvt. Ltd. vs. ACIT: Challenge Against Disallowance of Interest Deduction for AY 2016-17

Brahmaputra Finlease Pvt. Ltd. vs. ACIT: Tribunal Ruling on Disallowance of Interest Deduction

Case Number: ITA 6721/DEL/2019

Appellant: Brahmaputra Finlease Pvt. Ltd., New Delhi

Respondent: ACIT, Central Circle-15, New Delhi

Assessment Year: 2016-17

Result: Appeal decided on 18th April 2023

Order Type: Final Tribunal Order

Date of Order: 18th April 2023

Background of the Case

The case revolves around Brahmaputra Finlease Pvt. Ltd., a company engaged in the business of lending, which challenged the disallowance of an interest deduction under Section 36(1)(iii) of the Income Tax Act for the assessment year 2016-17. The appellant argued against the disallowance of Rs. 8,23,459, which was imposed by the Assessing Officer (AO) on the grounds that the interest paid on borrowed funds exceeded the interest income received on loans and advances.

Key Points of the Tribunal’s Decision

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, comprising Shri Kul Bharat, Judicial Member, and Shri M. Balaganesh, Accountant Member, presided over the case. The appellant was represented by Ms. Monika Agarwal, Advocate, while the respondent was represented by Shri Kanv Bali, Senior Departmental Representative.

The Assessing Officer had disallowed the interest deduction, asserting that the company, engaged in lending, could not justify paying more interest on unsecured loans than it earned from its lending activities. The AO concluded that the company had diverted borrowed funds to provide interest-free loans, resulting in an excess interest payment that was not eligible for deduction under Section 36(1)(iii).

Arguments and Analysis

The appellant’s counsel, Ms. Monika Agarwal, argued that the company had sufficient interest-free funds, which were utilized for advancing interest-free loans to certain parties. She contended that the disallowance was unjustified as the borrowing was used for the purpose of business, and the interest paid on such borrowing should be eligible for deduction, regardless of the interest rate charged on the loans advanced.

The respondent’s counsel, Shri Kanv Bali, argued that as a Non-Banking Financial Company (NBFC), Brahmaputra Finlease Pvt. Ltd. was expected to earn interest income on every loan, which should have exceeded the interest paid on borrowings. He maintained that the disallowance was justified given the nature of the company’s business.

The Tribunal noted that the issue at hand was whether the appellant could claim a deduction for the interest paid on borrowed funds used in its lending business, even when the interest income received was lower than the interest paid. The Tribunal referred to previous decisions, including the Supreme Court’s rulings in the cases of Reliance Industries Ltd. and S.A. Builders Ltd., which established that interest paid on borrowings used for business purposes is deductible under Section 36(1)(iii), regardless of the income generated.

Tribunal’s Ruling

The ITAT ruled in favor of the appellant, Brahmaputra Finlease Pvt. Ltd., holding that the disallowance of interest was not justified. The Tribunal emphasized that the appellant had utilized the borrowed funds for its lending business and that the interest deduction under Section 36(1)(iii) should be allowed, even if the interest income earned was less than the interest paid.

The Tribunal also referenced its earlier decision in the appellant’s own case for the assessment year 2014-15, where a similar disallowance had been overturned. The Tribunal reiterated that as long as the borrowing was used for business purposes, the interest paid on such borrowing is eligible for deduction under Section 36(1)(iii) of the Income Tax Act.

Conclusion

In conclusion, the Tribunal directed the Assessing Officer to delete the disallowance of Rs. 8,23,459. The ruling in favor of Brahmaputra Finlease Pvt. Ltd. reaffirms the principle that interest paid on borrowings used for business purposes is deductible under Section 36(1)(iii), regardless of the interest income generated from those borrowings.

This decision provides important clarity for NBFCs and other companies engaged in lending, emphasizing the deductibility of interest expenses even when the lending rates are lower than borrowing costs.

The ITAT’s ruling on 18th April 2023 marks a significant judgment in the application of Section 36(1)(iii) and underscores the importance of maintaining a clear distinction between the purpose of borrowing and the rate of interest earned.

Brahmaputra Finlease Pvt. Ltd. vs. ACIT: Challenge Against Disallowance of Interest Deduction for AY 2016-17