2018 (4) TMI 519 - AT - Income Tax

Disallowance u/s. 36(1)(iii) - loans for business expediency - Held that - The company has mostly taken loan and advances from related parties. The company has to pay interest to Rasandik Engineering Industries India Ltd. for affect that this company is a public limited company and it cannot be given interest free loan / advance to Ganesha Securities Pvt. Ltd. Rasandik Auto Components Pvt. Ltd. is a subsidiary of Rasandik Engineering Industries Ltd. and therefore, the same condition as mentioned above applies in this case as well. In earlier years similar additions were made and such notional interest as was added in those years were deleted by the CIT(A) in respect of assessment years 2010-11 and 2011-12. We find considerable cogency in the contention of the Ld. AR that the fact situation remains the same as in earlier years and as a matter of fact the interest expenditure has almost halved compared to last year. These loans are not new but were made a couple of years back for business expediency out of own surplus funds (which is evident from para 4.11 of the assessment order) wherein it was stated that the funds advanced are more than the loan bearing funds. It was also pleaded that the loans that were issued afresh this year (in addition to the loans extended in earlier years) amounts to only ₹ 8 lakhs. Keeping in view of the facts and circumstances of the case and on the basis of consistency principles, the addition in dispute is deleted and accordingly, the ground raised by the Assessee stand allowed.

Summary

Issues:
- Disallowance of interest as business expenditure under section 37 of the Income Tax Act, 1961.

Analysis:
1. The Assessee filed an appeal against the Order of Ld. CIT(A)-18, New Delhi for the assessment year 2012-13, challenging the disallowance of ?6,55,675 under section 36(1)(iii) of the Income Tax Act, 1961. The Assessee's return of income for AY 2012-13 declared a business loss after setting off brought forward losses and paying income tax under section 115JB. The AO observed that interest payments on loans claimed as business expenditure were advanced interest-free for non-business purposes to sister concerns. The AO disallowed ?6,55,675 as interest expenditure, adding it back to the Assessee's income, resulting in a loss of ?14,68,258 under section 143(3) of the Act.

2. The Assessee appealed to the Ld. CIT(A), who partly allowed the appeal but upheld the disputed addition. The Assessee then appealed to the Tribunal, arguing for deletion of the addition based on earlier years' decisions by the Ld. CIT(A) where similar additions were deleted. The Ld. Counsel contended that the fact situation remained the same, and the interest expenditure had decreased compared to the previous year.

3. The Tribunal considered the arguments and case laws cited by both parties. It noted that the AO disallowed interest payments claimed as business expenditure due to loans advanced interest-free for non-business purposes. The Assessee explained that financial difficulties led to loans from related parties, and interest was necessary for business expediency. The Tribunal found merit in the Assessee's contentions, noting consistency with earlier years' decisions by the Ld. CIT(A) where similar additions were deleted. The Tribunal observed a decrease in interest expenditure compared to the previous year and accepted that the loans were issued for business expediency out of surplus funds. Consequently, the Tribunal deleted the disputed addition, allowing the Assessee's appeal.

4. In conclusion, the Tribunal allowed the Assessee's appeal, emphasizing the consistency of principles with earlier decisions and the business expediency of the loans issued. The Tribunal's decision to delete the addition of ?6,55,675 as interest expenditure was based on the facts and circumstances of the case, ensuring fairness and adherence to established principles.