2018 (5) TMI 2093 - AT - Income Tax

Disallowance of expenditure - addition made as not carried out any business activity - CIT-A restricted the disallowance to the 2/3rd of the total expenditure following the order of his predecessor for assessment year 2007-08 which was further confirmed by the Tribunal - HELD THAT - As assessee could not convince us as to the business activity carried out by the assessee requiring the allowance of the entire expenditure claimed. We, therefore, do not find any reason to interfere with the above order of CIT(A) on this issue. Ground No.1 of the appeal is therefore, dismissed. Notional disallowance of the interest expenditure u/s 36(i)(iii) - giving loans to sister concerns at low interest - Proof of business expediency - AO observed that during the year it had obtained term loan on which the assessee had paid interest @ 11% to the bank. However, the assessee during the year had also given loan / advance to its sister concern and charged interest @ 8% - HELD THAT -We find that the case of the assessee is thus squarely covered by the aforesaid decisions of the Hon'ble Supreme Court in the case of Hero Cycles P. Ltd v CIT 2015 (11) TMI 1314 - SUPREME COURT and Bright Enterprises Pvt Ltd Vs. CIT 2015 (11) TMI 342 - PUNJAB HARYANA HIGH COURT and Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein the Hon'ble Courts have held that where the own funds of the assessee were sufficient to meet the interest free advances given during the year, then the presumption would arise that such advances or investments had been made out of the own funds of the assessee - disallowance to be deleted - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenditure by CIT(A)
2. Notional disallowance of interest expenditure under section 36(i)(iii) of the Act

Issue 1: Disallowance of Expenditure by CIT(A):
The appeal was against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of expenditure. The Assessing Officer observed that the assessee did not carry out any business activity during the year. The CIT(A) restricted the disallowance to 2/3rd of the total expenditure based on previous orders. The Tribunal upheld this decision as the assessee failed to demonstrate the business activity necessitating the allowance of the entire expenditure claimed. The appeal on this issue was dismissed.

Issue 2: Notional Disallowance of Interest Expenditure:
The Assessing Officer disallowed the difference in interest paid and charged under section 36(i)(iii) of the Act, as the assessee paid interest at 11% to the bank but charged interest at 8% to a sister concern. The CIT(A) calculated the debt equity ratio at 27:73 and restricted the disallowance to 27% of the total disallowed amount. The assessee argued that the advance was made from interest-free reserves and surpluses, citing legal precedents. The Tribunal examined the balance sheet showing reserves of ?142.47 crores against an advance of ?3 crores at 8% interest. Relying on legal decisions, the Tribunal concluded that the disallowance was unjustified. Therefore, the disallowance on this issue was ordered to be deleted, and the appeal was partly allowed.

In conclusion, the Tribunal upheld the disallowance of expenditure by the CIT(A) due to lack of evidence of business activity but ruled in favor of the assessee regarding the notional disallowance of interest expenditure, finding it unjustified based on the available reserves and legal precedents.