2019 (6) TMI 1537 - AT - Income Tax

Expenditure u/s 36(1)(iii) - lower interest paid on the borrowings made by the assessee company from the sister concerns or the group companies - whether no evidence produced by the assessee to prove that these expenditures were not in the nature of personal or capital expenditure and were wholly expended for the purposes of business? - HELD THAT - It is essentially a finding of fact as to whether the lower interest paid on the borrowings made by the assessee company from the sister concerns or the group companies is for the purpose of its business or not. Whether it is commercially expedient or not for the Assessee cannot be decided by the Revenue authorities and unless a decision taken in the usual course of business by the Assessee can be held to be arbitrary or motivated, deliberately taken to defeat the purpose of the Revenue, it cannot be held that the lower interest rate paid to the borrowers on the borrowings made by the assessee company is disallowable under Section 36 (1) (iii) of the Act. No such finding of fact has been recorded by the Tribunal in 2018 (7) TMI 1476 - ITAT CHENNAI When the cash system of accounting was adopted by the Assessee, an Investment Company, whose business is only to borrow and lend or invest, the same cannot be said to be not in the business interest or commercially expedient for the purpose of business and the concept of ;Matching Principles;, which has been applied by the Assessing Authority and the CIT (A) in the present case, was not really applicable. It is not for the Revenue authorities to substitute their own wisdom or notion about the rate of interest agreed to between the parties, including the group companies and, as such, the finding of fact about commercial expediency or absence thereof is a finding of fact, out of which, no substantial question of law can be said to be arising, requiring our consideration under Section 260A - Decided in favour of assessee.

Summary

Issues:
- Disallowance of expenditure under section 36(1)(iii) of the Income Tax Act, 1961 for the assessment year 2012-13
- Claim of relief by the assessee without establishing commercial expediency
- Application of matching principle in terms of income and expenditure for allowability

Analysis:
1. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-2, Chennai, regarding the disallowance of expenditure under section 36(1)(iii) of the Income Tax Act, 1961 for the assessment year 2012-13. The Assessing Officer disallowed a specific amount under this section, and the assessee firm, engaged in providing financial support, appealed the decision. The CIT(A) allowed the appeal, following a previous Tribunal decision for a different assessment year. The Revenue challenged this decision on various grounds, arguing that the expenditure claimed was not wholly for business purposes as required by the Act.

2. The Revenue contended that the CIT(A) erred in providing relief to the assessee without proper examination of the commercial expediency behind the loans advanced and the interest liability incurred. They argued that the loans and interest payments should be directly related to the business interests of the firm and not personal interests of directors or partners. The Revenue also highlighted the importance of establishing a nexus between income and expenditure for allowability under sections 36 and 37 of the Act.

3. During the proceedings, the Departmental Representative presented arguments based on the grounds of appeal, while the Authorized Representative of the assessee referenced a previous Tribunal decision that was upheld by the Jurisdictional High Court. The High Court's order emphasized the importance of commercial expediency in determining the allowability of interest paid on borrowed capital for business purposes. The Court dismissed the Revenue's appeal, stating that the interest paid must be for the business's benefit and that the Revenue authorities cannot substitute their judgment on commercial expediency.

4. Ultimately, the Tribunal upheld the decision of the Jurisdictional High Court and dismissed the Revenue's appeal, citing the lack of substantial legal questions and the factual nature of the case. The Tribunal agreed that the interest paid on borrowed capital must be commercially expedient for the business, and in this case, the concept of matching principles did not apply due to the nature of the assessee's business as an investment company. The Tribunal concluded that the Revenue's appeal lacked merit and was therefore dismissed.

This detailed analysis of the judgment provides insights into the legal reasoning and arguments presented by both parties, as well as the application of relevant provisions of the Income Tax Act in determining the allowability of expenditure and interest payments for business purposes.