2015 (5) TMI 1211 - AT - Income Tax

Disallowance of interest paid to Star India Pvt. Ltd. - Addition of interest as loan transactions have not been declared in Form 3CEB and, therefore, escaped addition of Transfer Pricing officer - assessee is engaged in business of trading in rights of cinematographic films and television programme software etc. - as per AO held that advance was not taken as business expediency, but was to evade taxable income in the hands of the assessee - CIT-A deleted the addition - HELD THAT - As found from the record that the financial statements of assessee evidenced utilization of borrowed funds for procuring rights in respect of various genres of films from third parties for sale to SGL Entertainment. As such borrowed funds on which interest has been paid were utilized for purpose or business entitling assessee to claim deduction u/s 36(1)(iii). Regarding A.O. s observation that the act of borrowing funds from SIPL is not in business expediency and with a view to avoid taxability in the hands or the assessee, we found that funds were borrowed from SIPL for business purpose, the expenses being wholly and exclusively for the purpose of business based on commercial expediency. Interest expenses were incurred for purpose of assessee's own business, profits of which are chargeable to tax under the provisions of the Act. Whether a particular expenditure is necessary considering commercial expediency has to be decided from the point of view of businessman alone and not by the Revenue authorities. As per the finding recorded by the CIT(A), M/s Star India Pvt. Ltd. is not coming within the purview of Section 40A(2), therefore, it cannot be said that interest so paid to a related party so as to avoid burden of tax on the assessee. The detailed findings of the CIT(A) recorded at para 2.3 and 2.3.1 has not been controverted by department by bringing any positive material on record. No reason to interfere in the order of CIT(A) deleting disallowance on interest. - Decided against revenue.

Summary

Issues:
- Appeal filed by revenue against order of CIT(A)-3, Mumbai for assessment years 2005-06 & 2006-07 regarding disallowance of interest paid to Star India Pvt. Ltd.

Analysis:
- The revenue's grievance in both appeals was the deletion of disallowance of interest paid to Star India Pvt. Ltd.
- The AO disallowed the interest paid as the loan transactions were not declared in Form 3CEB and viewed it as an attempt to evade taxable income.
- The CIT(A) deleted the disallowance stating lack of evidence for tax evasion and business expediency.
- The financial statements showed borrowed funds were utilized for business purposes entitling the assessee to claim deduction under section 36(1)(iii).
- The borrowing of funds from Star India Pvt. Ltd. was found to be for business purposes based on commercial expediency.
- The necessity of expenditure for commercial expediency is to be decided from the businessman's viewpoint, not by Revenue authorities.
- The CIT(A) findings were supported by legal precedents, and the Revenue failed to provide contrary evidence.
- The judgment for the assessment year 2006-07 was based on similar reasoning as for 2005-06, leading to the dismissal of both appeals by the revenue.

Conclusion:
- The Tribunal upheld the CIT(A)'s decision to delete the disallowance of interest paid to Star India Pvt. Ltd. for both assessment years, emphasizing the business purpose and commercial expediency behind the borrowing of funds. The Revenue's appeals were dismissed, and the orders were pronounced on 13/05/2015.