2016 (4) TMI 734 - AT - Income Tax

Disallowance on Account of Interest - loan to sister concern, a sick unit, fee of Interest - Held that - No interest has been charged by the assessee firm from the said sister concern. The assessee firm has not been able to show that the loan amount has been advanced by the assessee firm from the partner s capital account. The case laws relied upon by the assessee firm are clearly distinguishable as in the instant case, the assessee firm is not able to demonstrate that the said loans were granted for business of the assessee firm due to commercial expediency. However, the assessee firm has brought on record that the total interest amount paid by the assessee firm is ₹ 10,85,011/- which include the interest paid for car loan for which there is a specific and dedicated borrowings for buying a car. The assessee firm has taken a plea that the sister concern has become a sick company , however, no such evidence/cogent material to this effect has been brought on record. In our considered view and in the interest of justice, the matter needs to be set aside to the file of A.O. for re-determination of the issue de-novo after considering the cogent material/evidences of the assessee firm to be brought on record by the AO to prove its contentions that the interest free funds have been advanced by the assessee firm to the sister concern of the assessee firm and to that extent the assessee firm will be entitled for relief. Further, the A.O. shall also consider the plea of the assessee firm that the interest have been paid on specific and dedicated borrowings such as for acquiring car etc. on which in our considered view, no disallowance of interest paid on dedicated and specific borrowings is warranted. Needless to say that the AO shall give proper and adequate opportunity of being heard in accordance with principles of natural justice in accordance with law

Summary

Issues:
Disallowance of interest on account of interest-free advance to sister concern.

Analysis:
1. The appeals by the assessee firm were directed against two separate orders of the CIT(A) for the assessment years 2008-09 and 2009-10, concerning the disallowance of Rs. 10,85,012 on account of interest. The identical issue was involved in both appeals and was disposed of by a common order for convenience.

2. The assessee firm had given an interest-free advance of Rs. 4,86,96,890 to its sister concern, which was greater than the partner's capital of Rs. 3,47,32,991. The AO observed that the advance was made from borrowed capital, leading to a claim of Rs. 10,85,011 as interest expense. The AO sought justification for not making a proportionate disallowance due to diversion of borrowed capital for non-business purposes.

3. The CIT(A) rejected the assessee's contentions, emphasizing the lack of business expediency in advancing interest-free funds to the sister concern. Citing the Supreme Court decision in S. A. Builders, the disallowance of interest was upheld. The CIT(A) noted that the AO's calculation of disallowance was in line with the assessee's submission, limiting it to Rs. 10,85,012.

4. The Tribunal considered the movement of funds between the assessee and sister concern, finding no business transaction beyond fund transfers. No commercial expediency was shown for the interest-free advance, and the loan amount exceeded the firm's capital. The Tribunal directed the AO to reevaluate the issue, considering evidence from the assessee to determine the legitimacy of the advance and specific borrowings for items like car loans.

5. The Tribunal's decision for the assessment year 2008-09 was applied mutatis mutandis to the appeal for 2009-10, ultimately allowing the appeals for statistical purposes.

This detailed analysis covers the issues raised in the legal judgment comprehensively, highlighting the arguments, decisions, and directions provided by the various authorities involved in the case.