2014 (11) TMI 225 - HC - Income Tax

Interest payment disallowed What amounts to commercial expediency Whether the Tribunal was right in disallowing the interest payment when the interest free advances given to sister concern is out of own funds and out of commercial expediency - Held that - The assessee had borrowed from a person by paying interest, but has given non-interest bearing advances to the same person and there is no commercial expediency - The assessee has been unable to explain this transaction - once this interest portion is removed, the interest payments to the banks are but minor - the advancement of non-interest bearing funds to related parties is not compelled by any commercial expediency. The assessee has also not proved before any commercial expediency in regard to any of the interest-free advances given to the related parties - The claim of the assessee that it had adequate non-interest bearing funds to give the interest-free advances is seen otherwise insofar as the non-interest bearing funds available with the assessee is in the form of profits of the year which obviously cannot be determined until the end of the year - even assuming that these funds were available, it would have to be seen in line with the cash book of the assessee - the resolution to advance the amounts to one of the concerns was held on 22.04.2002, i.e. at the beginning of the financial year whereas the profits could be determined only during the end of the financial year thus, the order of the Tribunal is upheld Decided against assessee.

Summary

Issues:
1. Disallowance of interest payment for assessment years 2004-05 and 2005-06.
2. Disallowance of interest payment on interest-free advances to sister concern.
3. Disallowance of interest payment on fixed loan unrelated to subsequent interest-free advances.

Analysis:
1. The appellant, a private limited company in the film exhibition business, netted interest payments against interest income, admitting only the balance as income. The Assessing Officer found substantial non-interest bearing advances to related parties, with interest payments including those to an associated firm. The AO observed diversion of funds to associates without interest charges, incurring interest on borrowed funds less than own funds with associates. Lack of evidence on necessity or benefit led to disallowance of interest payments.

2. The Commissioner of Income Tax (Appeals) allowed the claim, citing commercial expediency based on various decisions. However, the Income Tax Appellate Tribunal, siding with the Revenue, held the non-interest bearing advances lacked commercial expediency as the appellant failed to prove it. The Tribunal highlighted the mismatch between interest payments and interest-free advances, indicating a lack of commercial rationale.

3. The Tribunal's detailed analysis revealed the absence of commercial expediency in interest payments, emphasizing the appellant's failure to justify the interest-free advances to related parties. The Tribunal noted the timing discrepancy between fund availability and resolution for advances, supporting the disallowance of interest payments. The High Court concurred with the Tribunal's findings, upholding the disallowance and dismissing the appeals, as no substantial question of law arose from the case.

Conclusion:
The High Court affirmed the Tribunal's decision, emphasizing the lack of commercial expediency in the interest payments and interest-free advances, leading to the disallowance of the appellant's claims. The judgment underscores the importance of demonstrating commercial rationale in financial transactions to avoid disallowances in tax assessments.