2016 (7) TMI 824 - AT - Income Tax

Disallowance of interest under Section 36(1)(iii) - AR challenging the impugned order contended that the assessee company has transferred certain funds to its subsidiary company without any interest out of the loan taken at interest for business expediency - Held that - The assessee has advanced loan of ₹ 1,23,48,111/- to Shri Manoj Kumar Jain without charging any interest and lent loan of ₹ 3,28,30,957/- to M/s. R.J. Fabrics by charging interest @ 6% out of the funds borrowed by the assessee at the interest of 18%. Had the loan been advance to Shri Manoj Kumar Jain and M/s. R.J. Fabrics for commercial expediency, the assessee would not have charged interest even @ 6% per annum. The assessee has failed to prove any business nexus between the assessee company and Shri Manoj Kumar Jain except the fact that Shri Manoj Kumar Jain is son of the assessee So, when the assessee has failed to prove commercial expediency for advancing the interest free loan/loan at the nominal rate of interest to its subsidiary and relative, the judgments cited as S.A. Builders vs. CIT (A) 2006 (12) TMI 82 - SUPREME COURT , Chandigarh, CIT vs. Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and CIT vs. Jugal Kishore Dangayach (2013 (11) TMI 1661 - RAJASTHAN HIGH COURT) relied upon by the assessee are not applicable to the facts and circumstances of the case. We are of the considered view that the AO has rightly disallowed the claim of the assessee u/s 36(1)(iii) of the Act, affirmed by the CIT (A). - Decided against assessee.

Summary

Issues involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Granting proportionate relief on disallowance of interest.
3. Disallowance of expenses under various heads.
4. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Analysis:

Issue 1: Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961:
The appellant sought to set aside the order disallowing interest of a specific amount under Section 36(1)(iii) of the Act. The Assessing Officer observed that interest-bearing funds were advanced to individuals without claiming commercial expediency. The Tribunal determined that the appellant failed to prove the business nexus for advancing interest-free loans, leading to the disallowance upheld by the CIT (A).

Issue 2: Granting proportionate relief on disallowance of interest:
The appellant contended that relief should be granted based on the availability of own interest-free funds. However, the Tribunal found no evidence of commercial expediency for the loans advanced, leading to the dismissal of this contention.

Issue 3: Disallowance of expenses under various heads:
The Assessing Officer disallowed a portion of expenses under different categories, adding back a specific amount to the total income of the assessee. The CIT (A) partly allowed the appeal, but the Tribunal ultimately dismissed this ground as the appellant gave up this argument during the proceedings.

Issue 4: Initiation of penalty proceedings under section 271(1)(c) of the Act:
The Assessing Officer initiated penalty proceedings under section 271(1)(c) of the Act, which the appellant challenged by contending that there was no concealment of income or furnishing of inaccurate particulars. However, the Tribunal determined this issue as premature and consequential in nature, ultimately dismissing the appeal.

In conclusion, the Tribunal dismissed the appeal, finding no illegality or perversity in the impugned order. The judgment highlights the importance of proving commercial expediency for financial transactions to claim deductions under the Income Tax Act.