2015 (7) TMI 1102 - AT - Income Tax

Addition on account of finance charges/interest on borrowed funds - whether assessee could not prove with evidence at the time of assessment that the borrowed funds are wholly exclusively used for business purpose or diverted to give interest free advance to sister concern - Held that - The assessee purchased non-convertible debentures of ETHL Communications Series-A on 11/02/2010 being 171 number of units of face value of ₹ 10,00,000/- and deal value of ₹ 15,09,93,000/-. Thus, it is seen that the Commissioner of Income Tax (Appeals) after verifying this letter has arrived at a conclusion that the amount borrowed was for purchase of debentures and not for any other purpose by the assessee. Further no evidence was brought on record by the Revenue to show that the assessee has advanced interest bearing funds to its subsidiaries as interest free advance - Decided in favour of assessee Addition made on account of interest free loans advanced to the sister concerns - Held that - We find that the Commissioner of Income Tax (Appeals) has observed that the assessee had given interest free advances to its subsidiaries in its business requirements. He placed reliance on the decision of the Hon ble Bombay High Court in the case of CIT-7 Vs. Reliance Communications 2012 (5) TMI 160 - BOMBAY HIGH COURT and has held that where interest free borrowed funds are advanced as interest free loans to its subsidiaries for business expediency, the interest cannot be disallowed. Commissioner of Income Tax (Appeals) held that in the case of the assessee, business expediency exists and interest free own funds have been advanced. No interest expenses have been claimed by the assessee on this account. Therefore, he correctly deleted the notional interest - Decided in favour of assessee

Summary

Issues:
1. Disallowance of finance charges/interest on borrowed funds
2. Disallowance of interest income on interest free loans advanced to sister concerns

Issue 1: Disallowance of finance charges/interest on borrowed funds
The appeal was filed against the order of Commissioner of Income Tax (Appeals) regarding the disallowance of Rs. 70,93,991 on account of finance charges/interest on borrowed funds. The Assessing Officer disallowed the interest as the assessee failed to prove whether the borrowed funds were used exclusively for business purposes or diverted to interest-free advances to sister concerns. However, the Commissioner of Income Tax (Appeals) deleted the disallowance, stating that interest-bearing loans were taken specifically for purchasing debentures, and loans to sister concerns were from the assessee's own reserves. The ITAT confirmed the decision, noting that no evidence was presented by the Revenue to show that interest-bearing funds were advanced as interest-free loans, thus upholding the Commissioner's decision.

Issue 2: Disallowance of interest income on interest free loans advanced to sister concerns
The Assessing Officer added Rs. 15,37,40,627 as interest income on interest-free loans advanced to subsidiaries, assuming the assessee would have earned interest at a market rate of 12%. On appeal, the Commissioner of Income Tax (Appeals) deleted the addition, citing business expediency as the reason for interest-free loans. The Commissioner referred to precedents and held that interest-free borrowed funds advanced as loans for business expediency cannot be disallowed. The ITAT upheld the decision, emphasizing that only real income earned by the assessee can be taxed, not notional income. The order was confirmed, and the appeal of the Revenue was dismissed by the ITAT.

In conclusion, the ITAT upheld the decisions of the Commissioner of Income Tax (Appeals) in both issues, emphasizing the lack of evidence presented by the Revenue to support disallowances and the principle of taxing only real income earned by the assessee. The judgments were delivered by the ITAT PANAJI in 2015.