2020 (2) TMI 1099 - HC - Income Tax

Disallowance of interest u/s 36 (1) (iii) - assessee had obtained interest bearing loans which had in turn been advanced to sister concerns and other associates without charging interest - ITAT allowed the appeal of the assessee, rejecting the disallowance made by the AO - HELD THAT - This Court in Commissioner of Income Tax v DD industries 2015 (3) TMI 895 - DELHI HIGH COURT observed that where adequate funds were available during the assessment years and, since in the past the Revenue had accepted the assessee s plea in this regard and not brought the amounts to tax under Section 36 (1)(iii), the Revenue could not have taken a different view for three years in question, particularly, without any conclusion that, in fact, general reserves, surpluses and other funds were not available. Reference may also be made to the decision of this Court in Commissioner of Income Tax v Tin Box Co. 2002 (11) TMI 75 - DELHI HIGH COURT wherein it was held that the finding of the Tribunal that the Department had not been able to controvert or disprove the fact that the assessee had substantial capital and interest-free funds available with it, not only in the preceding years but also in the years under consideration, which far exceeded the interest-free advances to the sister concern, is not without any evidence or material and therefore, disallowance of interest was deleted. Therefore, as already noted, in the present case, it is clear that there were sufficient interest free funds available with the assessee, allowing them to advance the loans in question. Thus, the Tribunal, in our view was correct in concluding that it could not be said that it was the interest-bearing loan obtained from Bank of Baroda and Andhra Bank which had been advanced as interest-free loan to M/s Gaursons India Ltd. No substantial question of law arises. We therefore find no infirmity in the impugned order passed by the Tribunal. No substantial question of law arises for our consideration

Summary

Issues:
1. Disallowance of interest by Assessing Officer under Section 36(1)(iii) of the Income Tax Act.
2. Assessment of interest expenses related to real estate development project.
3. Investment and loan transactions with related entities.
4. Business expediency and purpose of interest-free loans.
5. Compliance with legal provisions and judicial precedents.

Analysis:
1. The appeal challenged the order of the Income Tax Appellate Tribunal regarding the disallowance of interest amounting to ?5.68 crores by the Assessing Officer under Section 36(1)(iii) of the Income Tax Act for the assessment year 2014-15. The Tribunal allowed the appeal of the Respondent-assessee, stating that the interest-free advances were made for business purposes, thereby satisfying the conditions laid down in the Act.

2. The case involved a real estate development business where the assessee was developing a residential project. The assessee claimed interest expenses based on the percentage completion method due to the progress of the project. The Assessing Officer disallowed a portion of the interest expense, leading to a series of appeals culminating in the present case.

3. Two key transactions were examined concerning the investment and loan activities with related entities. The first transaction involved investments and loans to Gaursons Realtech Pvt. Ltd., where the Tribunal found a direct nexus between the expenditure incurred and the purpose of business, citing legal precedents to support the decision. The second transaction pertained to a loan advanced to M/s Gaursons India Ltd., the holding company of the assessee, with the Tribunal concluding that the interest-free funds available with the assessee justified the loan made.

4. The Tribunal's decision emphasized the availability of interest-free funds with the assessee, which supported the argument that the loans in question were made for business purposes. Citing legal cases and judicial precedents, the Tribunal upheld the appeal of the assessee, highlighting the importance of business expediency and purpose in such financial transactions.

5. Ultimately, the High Court found no infirmity in the Tribunal's order and dismissed the appeal, stating that no substantial question of law arose based on the factual findings and legal interpretations presented in the case. The judgment underscored the significance of compliance with legal provisions and established judicial precedents in determining the validity of financial transactions and interest expenses in the business context.