2015 (7) TMI 397 - AT - Income Tax

Disallowance of interest expenses holding advances granted by the assessee to be not out of commercial expediency - CIT(A) deleted the interest - Held that - CIT(A), while granting relief to the assessee, has noted that the assessee has given interest free advances to those parties with whom the assessee was having regular business transactions and some of them were suppliers of raw-material and packing material and the advance was made for purchase of material. He also noticed that most of the advances were given in earlier years and there were few transactions done during the year under consideration. The ld. CIT(A) has further given a finding that the assessee had no liquid funds for its day to day business transactions and did not make any borrowing during the year nor any new advances were granted by the assessee and the advances, which were granted in earlier years, were in connection with the business of the assessee. The ld. CIT(A) has also noted that no disallowance on account of interest was made by the Assessing Officer in earlier years and after examining the various loans and advances in the light of the ratio laid down by the Hon ble Apex Court in the case of S.A. Builder Ltd. (2006 (12) TMI 82 - SUPREME COURT ) has given a categorical finding that the loans and advances given by the assessee were for business purposes. Before us, the Revenue has not brought any material on record to controvert the findings of the ld. CIT(A). Thus no reason to interfere with the order of the ld. CIT(A) for both the years under consideration. - Decided against revenue.

Summary

Issues Involved:
Disallowance of interest expenses for Assessment Years 2001-02 and 2002-03.

Analysis:

Issue 1: Disallowance of Interest Expenses for Assessment Year 2001-02

The case involved appeals by the Revenue against orders of the Commissioner of Income Tax (Appeals) for Assessment Years 2001-02 and 2002-03 regarding the disallowance of interest expenses. The Revenue contended that the CIT(A) erred in law and on facts in deleting the disallowance of specific amounts made by the Assessing Officer. The Assessing Officer disallowed the interest expenses based on the assessee's advance of interest-free loans to sister concerns despite incurring liability to pay interest on term loans and working capital loans. The CIT(A) upheld the assessee's appeal, emphasizing that the advances were for business purposes, and there was no commercial expediency to disallow the interest. The Tribunal concurred with the CIT(A)'s findings, noting that the assessee had no liquid funds for daily transactions, did not borrow during the year, and the advances were in connection with the business. The Tribunal found no reason to interfere with the CIT(A)'s order, dismissing the Revenue's appeals.

Issue 2: Disallowance of Interest Expenses for Assessment Year 2002-03

The facts and circumstances for the Assessment Year 2002-03 were similar to those of the preceding year. The Revenue challenged the CIT(A)'s decision to delete the disallowance of interest expenses made by the Assessing Officer. The CIT(A) had considered the nature of the advances, the regular business transactions with the parties, and the absence of borrowing or new advances during the year. The Tribunal, after reviewing the material on record, upheld the CIT(A)'s order, emphasizing that the advances were for business purposes, and there was no justification for disallowing the interest. The Tribunal found no grounds to interfere with the CIT(A)'s findings, consequently dismissing the Revenue's appeal for the year 2002-03 as well.

In conclusion, the Tribunal upheld the CIT(A)'s decisions for both assessment years, dismissing the Revenue's appeals and confirming that the interest expenses were allowable as they were incurred for genuine business purposes and were not devoid of commercial expediency.

This comprehensive analysis of the judgment highlights the key issues, arguments presented, and the final decisions rendered by the Tribunal, providing a detailed understanding of the legal aspects involved in the case.