2015 (9) TMI 1232 - AT - Income Tax

Disallowance of interest - whether the amounts advanced by assessee to its sister-concerns was for commercial expediency? - Held that - In order to reduce the litigation, assessee has charged interest on Natco Organics Ltd., in AY. 2008-09 and accounted for an amount of ₹ 5,96,29,676/-, by way of Board resolution in that year. Since Board resolution was passed subsequently and at the time of advance no interest was provided, the amount cannot be considered as accrued interest and this principle was also accepted by the ITAT in assessee s own case in AY. 2007-08, when such amount was brought to tax on notional accrual basis in that year. As far as advances to Krishnapatnam Port Co. Ltd., is concerned, assessee charged an amount of ₹ 60,82,000/- as interest and was accounted which was not even reduced by the AO in AY. 2006-07, while notional accrued interest was taxed in earlier year. Keeping these factors in mind and consistent with orders of ITAT in earlier years and later year, we are of the opinion that the amounts cannot be disallowed in this year, when assessee has offered amounts in a later year considering all the years for calculation of interest. The fact that assessee has business interest in various concerns which helps in its own business by way of supply of raw-material for critical products and also for transportation of goods for export, we are of the opinion that the advances are for the purpose of business and commercial expediency is established. For these reasons, we uphold assessee s contentions and reverse the orders of the AO and CIT(A) on this issue. AO is directed to delete the disallowance of interest, claimed on other borrowals, so made in these two assessment years. - Decided in favour of assessee.

Summary

Issues:
Whether interest claimed by the assessee on amounts advanced to sister-concerns should be disallowed for lack of commercial expediency.

Analysis:
The Appellate Tribunal ITAT Hyderabad heard the appeals against the Commissioner of Income Tax (Appeals) orders regarding interest claimed by the assessee on advances to sister-concerns. The primary issue was whether the advances were made for commercial expediency. The assessee, a drug manufacturing company, argued that the advances were for business purposes, citing previous ITAT decisions. The AO and CIT(A) disallowed the interest claimed. The ITAT remitted the issue to the AO for further examination. In subsequent proceedings, the AO maintained the disallowance, stating a lack of nexus between loans obtained and business utility. The CIT(A) upheld the AO's decision, emphasizing the need for commercial expediency.

The CIT(A) summarized the assessee's submissions but upheld the additions made by the AO, stating that the ITAT's directions were not followed. The ITAT in earlier and later years accepted that advances were for business purposes. The ITAT also considered the principles laid down by the Supreme Court in S.A. Builders Ltd. case. The ITAT found that the funds advanced were for business purposes up to a certain date. The ITAT concluded that the AO erred in disallowing the interest claim without proper examination and nexus establishment between advanced and borrowed funds.

The ITAT further analyzed the advances made during the relevant years and found that the assessee had sufficient own funds to advance to sister-concerns. Referring to a Bombay High Court decision, the ITAT concluded that the advances were not made out of borrowed funds. The ITAT noted that the assessee's borrowings were for specific purposes and that the banks did not allow diversion of funds. The ITAT found no logical basis for the disallowance by the AO and CIT(A). The ITAT also considered the interest charged on sister-concerns in later years, which further supported the business purpose of the advances. Ultimately, the ITAT allowed the appeals, directing the AO to delete the disallowance of interest claimed on other borrowings in the assessment years in question.

In conclusion, the ITAT ruled in favor of the assessee, emphasizing the business purpose and commercial expediency of the advances made to sister-concerns. The ITAT considered previous decisions, principles laid down by the Supreme Court, and the assessee's financial standing to determine that the interest claimed should not be disallowed.