2017 (7) TMI 70 - AT - Income Tax

Disallowance of interest under section 36(1)(iii) - Held that - The assessee got over draft limit from Axis Bank, Ludhiana for business purposes by mortgaging the property of partner of M/s B.S.W. Tools Corporation Ltd., a sister concern. If the over-draft facility would not have been available to the assessee, assessee would not have done the business to the extent as explained before the authorities below. The sister concerns have also earned profit by using the impugned funds and paid the taxes thereon. The ld. counsel for the assessee was, therefore, justified in arguing that where there is a revenue neutral, no adverse inference should be drawn. The assessee is, therefore, able to explain that interest free loans have been advanced to sister concern for business expediency. The assessee also pleaded before authorities below that Assessing Officer has not proved any nexus that interest free advances were made out of borrowed funds. Disallowance of interest under section 36(1)(iii) of the Act is not justified. - Decided in favour of assessee Addition u/s 40A(2)(b) - Held that - The assessee filed chart of interest paid to the same persons on unsecured loans to show that in preceding two assessment years, the rate of interest paid to them was at 8%. The ld. CIT(Appeals) confirmed the addition because assessee paid interest to the banks ranging between 12 to 15%. It is not denying fact that while obtaining loans from the bank, the parties shall have to go through various legal formalities and shall have to give securities to the satisfaction of the bank but in the case of unsecured loan, no such formality and guarantee/security shall have to be given. AO has also not make out a case of unreasonable payment of interest, as regards the facilities available to the assessee. Therefore, considering history of the assessee that assessee paid interest @ 18% to the same parties in preceding assessment years, we not find it to be unreasonable or excessive interest paid. Thus we delete the addition. - Decided in favour of assessee

Summary

Issues:
1. Condonation of delay in filing appeal.
2. Disallowance of interest under section 36(1)(iii) of the Income Tax Act.
3. Addition of interest paid on unsecured loans under section 40A(2)(b) of the Act.

Analysis:

Issue 1: Condonaion of delay in filing appeal
The appeal was found to be time-barred by one day, but the delay was condoned by the Tribunal. The delay was attributed to the late arrival of appeal papers at the Tribunal's office, despite being dispatched on time. The Tribunal accepted the explanation provided by the assessee and allowed the appeal to proceed despite the nominal delay.

Issue 2: Disallowance of interest under section 36(1)(iii) of the Income Tax Act
The Assessing Officer disallowed an amount under section 36(1)(iii) due to interest-free advances made by the assessee to sister concerns without charging interest. The AO questioned the business expediency of these advances and held that they were not for the purpose of earning income but to accommodate the sister concerns. The CIT(A) upheld the disallowance, stating that the assessee failed to prove commercial expediency. However, the Tribunal disagreed, citing legal precedents emphasizing commercial expediency and the allowance of interest-free loans for business purposes. The Tribunal set aside the lower authorities' orders and deleted the addition, holding that the interest-free loans were justified for business expediency.

Issue 3: Addition of interest paid on unsecured loans under section 40A(2)(b) of the Act
The AO added an amount to the assessee's income due to interest paid on unsecured loans to family members at a rate of 18%, considering it excessive compared to rates from banks. The CIT(A) upheld the addition, noting the higher interest rate paid to family members. However, the Tribunal found no justification for the addition, as the interest rate was consistent with previous years and not unreasonably high. The Tribunal emphasized the lack of legal formalities and securities required for unsecured loans, leading to a higher interest rate. Consequently, the Tribunal allowed the appeal, setting aside the addition of interest paid on unsecured loans.

In conclusion, the Tribunal allowed the assessee's appeal, overturning the disallowance of interest under section 36(1)(iii) and the addition of interest paid on unsecured loans. The Tribunal's decision was based on the principles of commercial expediency and the reasonable nature of the interest payments made by the assessee.