2016 (10) TMI 1309 - AT - Income Tax

Disallowance of interest expenses - addition being 2/3rd of interest expenditure claimed by the assessee - HELD THAT - Assessee has failed to comply with the express directions of Tribunal. The question for adjudication has been whether deduction of the interest expenditure claimed by assessee was justified or not in terms of section 36(1)(iii) of the Act and in the attending facts and circumstances of the case. Assessee was to justify the business expediency under which he had to pay interest on the borrowed funds at the rate more than the interest received on the same funds advanced by the assessee. Several opportunities were given by the AO by issuing notices u/s. 143(2) along with questionnaire in terms of Tribunal s directions but the assessee did not bother to comply with the notices issued to him. One of the submissions of the assessee has been that the loan was advanced at lower rate to Merlin Resources Pvt. Ltd. for a long period whereas the loan raised from Silverline Technologies Pvt. Ltd. was repaid in a short period. Assessee could not submit any evidence or any loan agreement before us in support of such contention nor could he lay any evidence to justify any business prospects by borrowing the funds at higher rate of interest and lending the said borrowed funds at lower rate of interest, particularly when the assessee was engaged in the business of financial services. There are also no previous or subsequent instances on record to prove such business practice of the assessee. Assessee failed to prove the business expediency, under which he chose to suffer loss in the business by paying much more interest on borrowed funds and by earning lesser interest on advancing the said borrowed funds. No justification to discard the conclusions of the authorities below regarding admissibility of inordinate interest expenditure claimed by assessee on borrowed funds. - Decided against assessee.

Summary

Issues:
Disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance of Interest Expenses
The appeal concerns the disallowance of interest expenses amounting to ?48,82,192, being 2/3rd of the total interest expenditure claimed by the assessee. The assessee, engaged in lending, financial services, and share trading, filed its return for the assessment year 2000-01, declaring income under section 117JA of the Act. The Assessing Officer disallowed a portion of the interest expenses claimed by the assessee, leading to the current appeal. The dispute arose from the differential rates of interest on loans raised and advanced by the assessee, prompting the Assessing Officer to make the disallowance. The Tribunal directed the Assessing Officer to determine the allowability of the expenditure in accordance with the Act's provisions. Despite multiple opportunities, the assessee failed to substantiate the business expediency justifying the interest payments on borrowed funds at a higher rate than the interest received on advanced funds. The Tribunal found the assessee's failure to comply with the directions and lack of evidence to support the claimed business expediency, leading to the dismissal of the appeal.

Conclusion:
The Tribunal upheld the disallowance of interest expenses, emphasizing the necessity for the assessee to establish the business expediency behind the interest payments. The failure to provide evidence supporting the differential rates of interest on loans raised and advanced led to the dismissal of the appeal. The judgment underscores the importance of substantiating business justifications for claimed expenditures to ensure their admissibility under the Income Tax Act.