Top Stories Loans from IPO Proceeds, Not Borrowed Funds: ITAT directs AO to recompute Interest Disallowance [Read Order] Considering the absence of a direct nexus between borrowed funds and loans advanced from IPO proceeds, the ITAT directed the AO to recompute the interest disallowance By Kavi Priya – On January 20, 2025 8:32 pm – 2 mins read

The Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ) directed the Assessing Officer ( AO ) to recompute the disallowance of interest expenses confirming that the loans advanced by the assessee were funded through proceeds from an Initial Public Offering ( IPO ) held in an escrow account and not borrowings funds. Ravikumar Distilleries Limited, the assessee, advanced loans of Rs. 2910.02 lakhs which the AO alleged were funded using interest-bearing borrowings. Based on this assumption, the AO disallowed interest expenses of Rs. 413.22 lakh and computed at 14.2%. Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here The disallowance was challenged before the Commissioner of Income Tax (Appeals) [CIT(A)] on the grounds that the loans were advanced using funds derived from its Initial Public Offering ( IPO ) held in an escrow account and not from borrowed funds.

The assessee’s counsel presented a “Statement of Utilization of Borrowed Funds” during the appeal showing that the funds used for the loans were from the IPO proceeds, explicitly separating them from interest-bearing funds. The assessee’s counsel argued that the advances were not only unrelated to borrowed funds but had been made in the Financial Year (FY) 2010-11, well before the assessment year under scrutiny (2012-13).

The assessee’s counsel submitted that the IPO proceeds were held in an escrow account, had been marked specifically for business activities and loans, and that there was no diversion of funds that could attract interest disallowance under the Income Tax Act. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the evidence presented and observed that the funds used for advances were shown distinct from borrowed funds. The CIT(A) ruled that the AO’s decision lacked factual grounding. On appeal by the revenue, the two-member bench comprising Manoj Kumar Aggarwal ( Accountant Member ) and Manu Kumar Giri ( Judicial Member ) clarified that under well-established principles of taxation, interest disallowance under Section 36(1)(iii) could only be applied where borrowed funds were used for non-business purposes or advances unrelated to commercial expediency. Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

In this case, the assessee’s advances were funded from IPO proceeds not from borrowed funds. So, the interest disallowance lacked merit. The tribunal directed the AO to recompute the interest disallowance, if any, after considering the clear demarcation between borrowed funds and IPO proceeds. The tribunal explained that the assessee had provided sufficient evidence to substantiate its claims and that the AO must reassess the matter accordingly. The appeal was allowed for statistical purposes. To Read the full text of the Order CLICK HERE