2019 (8) TMI 1057 - AT - Income Tax

Addition of interest on paid on loan - diversion of fund - advanced it to sister concern/group at lower rate - commercial expediency in such transaction - HELD THAT - The assessee in the instant appeal is a NBFC registered with its object of taking loans and advancing loans for earning interest or other income from investments. In both the years in appeal the assessee has taken loans from financial institutions on varying interest rates. It has also issued debentures in the past. Amounts have been advanced as loans as well as investments to other concerns which presently are only to the group/sister concerns. It is not the case that interest free loans have been given. Assessee has charged interest at varying rate depending on the market conditions and based on the needs of the concerns taking loan. Though it is not necessary that earning of profit is mandatory for the business concern to prove that the transactions entered into by it are for commercial expediency but still if the business concern show profit at the end of the year, it is an added feature which proves that the transactions entered by the concern are for commercial expediency and in the regular course of business. No inconsistency in the order of Ld. CIT(A) deleting the addition of notional interest made - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of interest on loan paid at a higher rate and advanced to sister concerns/group at a lower rate.
2. Determination of commercial expediency in the transactions entered by the assessee.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Interest
The Revenue challenged the deletion of additions amounting to ?3,56,46,484/- and ?2,54,33,672/- for Assessment Years 2004-05 and 2005-06 respectively. The additions were made by the Assessing Officer (AO) on the grounds that the assessee took loans at higher interest rates and advanced them to sister concerns at lower rates without proving commercial expediency. The CIT(A) had deleted these additions, observing that the assessee received interest ranging from 6.50% to 14% and did not obtain loans at higher rates to advance them at lower rates. The Tribunal upheld the CIT(A)'s decision, noting that there was not much difference in the interest rates paid and received by the assessee. The Tribunal found the AO's allegation devoid of merit and concluded that the addition for notional interest was uncalled for.

Issue 2: Determination of Commercial Expediency
The Revenue contended that the transactions entered by the assessee were not for commercial expediency. The Tribunal referred to the Supreme Court's decision in S.A. Builders Ltd. v. CIT(A), Chandigarh, which established that the expression "commercial expediency" includes expenditures incurred by a prudent businessman for business purposes, even if not under legal obligation. The Supreme Court emphasized examining whether the funds advanced were used for business purposes. The Tribunal found that the assessee, a non-banking financial company (NBFC), advanced loans and made investments in sister concerns as part of its regular business activities. The interest rates charged and paid by the assessee were based on market conditions, and the transactions were in the normal course of business. The Tribunal noted that the assessee showed profits in the relevant financial years, further supporting the commercial expediency of the transactions.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both Assessment Years 2004-05 and 2005-06, upholding the CIT(A)'s deletion of the additions made by the AO. The Tribunal found that the interest rates charged and paid by the assessee were reasonable and that the transactions were conducted for commercial expediency in the regular course of business. The order was pronounced in the open court on 21.08.2019.