2016 (9) TMI 693 - AT - Income Tax

Allowability of interest as deductible expenses - applicability of provision of section 40(a)(ia) - Held that - CIT(A) judicially taken into consideration that as per the facts and circumstances of the present case where the borrowers financial condition was not sound, the lenders might wish to postpone the recognition of interest income which may or may not be realized at all in future. Ld. CIT(A) has also appreciated that in the facts of the present case the said interest liability has been crystallized during the year, as earlier it was not certain whether the interest would be payable or not. Since the assessee has paid the interest after deducting TDS in current assessment year, and accordingly claimed the interest expenses in current assessment year as the assessee was in a position to pay the interest component and hence the same was provided and paid during the year under consideration. Ld. CIT(A) has rightly found no justification in disallowing such claim of the assessee for the payment of interest. It was also appreciated by ld. CIT(A) that since the assessee has deducted the TDS in AY 2009-10 under consideration therefore it would automatically be allowed in this year as per the provision of section 40(a)(ia). - Decided in favour assessee Interest attributable to loans - Whether the interest can be disallowed due to the closure of business/profession closure of one of the activities? - whether the interest expenses can be attributed to interest free loans given to sister concerns in present case? - Held that - CIT(A) while dealing with the first issue has rightly considered the facts of the present case and observed that the loan was initially taken for textile business, which has been closed/suspended due to adverse business conditions but the assessee is still showing income from certain other sources such as rental income and profit on sale of shares though not under the head Profits or gains of business or profession . Ld. CIT(A) while considering the latter judgement of Hon ble Supreme court in the case of Veecumsees (1996 (4) TMI 6 - SUPREME Court) had rightly come to the conclusion that business of the assessee is a composite business during the period under consideration and expenditure is incurred for this composite business activities. Hence, the ld. CIT(A) has rightly held that the claim of the assessee of interest cannot be denied. The ld. CIT(A) has also considered the figures regarding advance of interest free loans out of interest free loans from family and partner s capital and the ld. CIT(A) after considering the facts and figures and documentary evidences has correctly noticed that the interest free funds to the sister concerns during the period under consideration were out of interest free funds from the family members and it will not have any impact on the interest payment made by the assessee for the other business purposes. We have also found that as per assessment order the AO had not examined in detail to establish that the interest free loans to sister concerns were out of borrowed funds and therefore in the absence of proving any nexus between the borrowed funds and interest free loans given by the assessee, it was not justifiable for the AO to make any disallowance. - Decided in favour assessee

Summary

Issues Involved:

1. Deductibility of interest expense of ?38,36,600/- in A.Y. 2009-10.
2. Timing of interest accrual and deductibility.
3. Deductibility of finance cost of ?19,82,930/- in A.Y. 2009-10.
4. Onus of proving interest-free advance from borrowed funds.
5. Qualification of income under the head "Income from Business."
6. Deductibility of interest for a ceased business.
7. Reliance on the Supreme Court decision in Veecumsees v/s CIT.
8. Allowance of expenses after business closure.

Detailed Analysis:

Issue 1: Deductibility of Interest Expense of ?38,36,600/- in A.Y. 2009-10

The Revenue argued that the interest should have been debited in the year it was liable to be paid or accrued, as the assessee follows the mercantile system of accounting. The Revenue relied on the Supreme Court judgment in Kedarnath Jute Manufacturing Co. Ltd. vs. CIT. However, the assessee contended that the interest liability crystallized during the year under consideration due to mutual arrangements with lenders, and TDS was deducted and paid in A.Y. 2009-10. The CIT(A) found no justification in disallowing the interest claim, noting that the interest liability was uncertain in earlier years and crystallized in the current year. The Tribunal upheld the CIT(A)'s decision, emphasizing that the interest was paid and TDS deducted in the current year, making it an allowable expense.

Issue 2: Timing of Interest Accrual and Deductibility

The Revenue contended that the interest liability should have been recognized in earlier years under the mercantile system. The CIT(A) distinguished this case from Kedarnath Jute Manufacturing Co. Ltd., noting that the liability was uncertain and crystallized only in the current year. The Tribunal agreed, stating that the interest was allowable in the year it was paid and TDS was deducted, as per the proviso to section 40(a)(ia).

Issue 3: Deductibility of Finance Cost of ?19,82,930/- in A.Y. 2009-10

The Revenue argued that the finance cost related to loans taken for a business that had ceased operations and should not be deductible. The assessee countered that the loans were partly financed by interest-free loans from family members and partners' capital. The CIT(A) found that the assessee's business was composite, and the interest expense was for the overall business activities. The Tribunal upheld this view, noting that the interest-free loans from family members covered the advances to sister concerns, and there was no nexus between borrowed funds and interest-free loans given.

Issue 4: Onus of Proving Interest-Free Advance from Borrowed Funds

The Revenue argued that the assessee failed to prove that interest-free advances were from non-borrowed funds. The CIT(A) found that the interest-free loans from family members and partners' capital exceeded the advances to sister concerns. The Tribunal agreed, stating that the AO did not establish a nexus between borrowed funds and interest-free loans, making the disallowance unjustified.

Issue 5: Qualification of Income under the Head "Income from Business"

The Revenue contended that the assessee's income from rent and capital gains did not qualify as "Income from Business." The CIT(A) and Tribunal found that the assessee's business was composite, and the interest expense was for the overall business activities, making it deductible.

Issue 6: Deductibility of Interest for a Ceased Business

The Revenue argued that interest expenses should not be deductible for a ceased business. The CIT(A) relied on the Supreme Court decision in Veecumsees v/s CIT, which allowed interest deduction for discontinued business if the loans were initially for business purposes. The Tribunal upheld this view, noting that the assessee's business was composite, and the interest expense was for the overall business activities.

Issue 7: Reliance on the Supreme Court Decision in Veecumsees v/s CIT

The Revenue argued that the CIT(A) erred in relying on Veecumsees v/s CIT. The CIT(A) and Tribunal found the decision relevant, as it allowed interest deduction for discontinued business if the loans were initially for business purposes.

Issue 8: Allowance of Expenses After Business Closure

The Revenue contended that expenses should not be allowed after business closure. The CIT(A) and Tribunal found that the assessee's business was composite, and the interest expense was for the overall business activities, making it deductible.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the interest and finance cost deductions. The Tribunal found the CIT(A)'s findings judicious and well-reasoned, with no new circumstances presented by the Revenue to rebut or controvert these findings. The appeal was dismissed, and the CIT(A)'s order was upheld.