2018 (12) TMI 638 - AT - Income Tax

Addition on account of interest u/s 36(1)(iii) - deposits given by the assessee so as to acquire the right to collect the maintenance charges from various licensees and the same were inextricably linked with the contractual terms entered into by the assessee - Held that - The quantum as well as periodicity of deposits was provided by the contractual terms and the terms also provided for refund of the same in certain eventuality. AO has disallowed the interest on the premise that the deposit was excessive in nature keeping in view the deposits sought by other entities under similar circumstances. AO was not justified in sitting on the armchair of a businessman so as to adjudge the sufficiency of the deposits given by the assessee which was duly authorized by the contractual terms. This is further fortified by the fact that deposits were given by the assessee out of commercial expediency so as to get the right to collect the maintenance charges from the licensees which generated business income for the assessee. The same was inextricably linked with contract generating business income for the assessee - tax planning is legitimate provided it fell within the four corners of law and it is permissible under the law provided the same is not a colorable device and not done so as to merely defraud the exchequer - no such attempt by the assessee in the present case - the genuineness of the unsecured loans or interest expenditure was not under doubt. The only condition envisaged by Section 36(1)(iii) to grant deduction of interest expenditure is that the funds were used by the assessee for the purpose of business and nothing more - no infirmity in the stand of first appellate authority. Our view is fully supported by the analogy of the decision rendered in S.A.Builders Vs. CIT 2006 (12) TMI 82 - SUPREME COURT - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) on account of excessive deposits.
2. Allowability of interest expenditure on unsecured loans for business purposes.

Issue 1: Disallowance of interest under section 36(1)(iii) on account of excessive deposits
The appeals by the revenue for Assessment Years 2013-14 & 2014-15 challenged separate orders of the first appellate authority on common grounds. The primary issue revolved around the deletion of addition of ?1,07,88,885/- on account of interest under section 36(1)(iii) by the Assessing Officer. The dispute stemmed from the excessive deposits made by the assessee to a related entity, which the Assessing Officer deemed as not genuine and not at arm's length price. The deposits were considered excessive compared to the annual income and receipts of the assessee. The Assessing Officer also questioned the source of the interest-free deposit and its link to unsecured loans taken by the assessee. The Assessing Officer concluded that the interest expenditure claimed against unsecured loans could not be allowed under section 36(1)(iii) due to the excessive deposits. However, the first appellate authority, in the impugned order, deleted the additions, emphasizing that the deposits were made as per contractual terms and were linked to generating business income for the assessee.

Issue 2: Allowability of interest expenditure on unsecured loans for business purposes
The dispute also centered around the allowability of interest expenditure on unsecured loans for business purposes. The Assessing Officer disallowed the interest on the premise of excessive deposits, while the first appellate authority found the interest paid on borrowings to be allowable under section 36(1)(iii). The Tribunal, after considering the contractual terms and commercial expediency involved in the deposits, upheld the decision of the first appellate authority. The Tribunal noted that tax planning is legitimate if within the legal framework and not a colorable device. It emphasized that the genuineness of the unsecured loans and interest expenditure was not in doubt, and the funds were used for the purpose of business. The Tribunal cited the decision in S.A. Builders Vs. CIT [2006 288 ITR 1] to support the allowance of interest expenditure in cases where there is a nexus between the expenditure and the purpose of the business. Consequently, the Tribunal dismissed the revenue's appeal for both Assessment Years 2013-14 & 2014-15, affirming the decision of the first appellate authority.

In conclusion, the Tribunal upheld the first appellate authority's decision to delete the additions related to interest disallowance and allowed the interest expenditure on unsecured loans for business purposes, dismissing the revenue's appeals for both Assessment Years.