2018 (7) TMI 1476 - AT - Income Tax

Disallowance u/s.36(1)(iii) - advancing of loans - Disallowing part of the interest expenses based on matching principle - Held that - Assessee has been considered as an investment company and making investments was part of its business. Hon ble Jurisdictional High Court also in the case of CIT vs. Shriram Investments (Firm) 2014 (11) TMI 55 - MADRAS HIGH COURT also held that deduction u/s.36(1) (iii) of the Act had to be allowed in respect of interest paid, if capital was borrowed for the purpose of business or profession. As already mentioned by us, there is no finding by any of the lower authorities that disparity between interest receipts and payments arose on account of charging of lower rate of interest on loans advanced when compared to interest paid on loans received. In the circumstances, we are of the opinion that ld. Assessing Officer was not justified in making a disallowance for the difference between interest received and interest paid by the assessee. - Decided in favour of assessee

Summary

Issues:
Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961 based on the matching principle.

Analysis:

Issue 1: Disallowance of Interest under Section 36(1)(iii)
- The appellant, engaged in financing and investments, filed an appeal against the disallowance of ?1,65,81,384 under section 36(1)(iii) of the Income Tax Act, 1961.
- The Assessing Officer disallowed the amount due to the disparity between interest received and paid, citing lack of business prudence in receiving lesser interest while paying higher interest to related parties.
- The Commissioner of Income Tax (Appeals) upheld the disallowance, emphasizing the concept of the matching principle and the applicability of Section 40A(2)(b) of the Act.
- The appellant argued that the advances given were in the business interest, following a cash system of accounting, and presented past judgments supporting commercial expediency of investments.
- The Tribunal noted that the appellant's cash basis system did not require the application of the matching principle, as interest was accounted for at the point of receipt and payment.
- Previous tribunal decisions and High Court rulings supported the appellant's business nature of investments, and there was no evidence of undercharging interest.
- Consequently, the disallowance of ?1,65,81,384 was deemed unjustified, and the appeal was allowed.

This judgment clarifies the application of the matching principle in disallowing interest under section 36(1)(iii) of the Income Tax Act, emphasizing the significance of the accounting system followed by the assessee and the business nature of investments. The decision provides guidance on assessing interest discrepancies in related party transactions and upholds the principle of commercial expediency in financial dealings.