2020 (5) TMI 596 - AT - Income Tax

Disallowance u/s 36(1)(iii) - interest expenses incurred on advancement of loans to the sister concerns on account of commercial expediency - appellant's arguments that the advances were made out of own funds and the same was out of commercial expediency - HELD THAT - Though the assessee made an oral plea that the money had been advanced to the sister concerns on account of commercial expediency, the assessee failed to place any evidence to suggest whether funds advanced by the assessee to the sister concerns was in the nature of interest free own funds or the funds were advanced on account of commercial expediency. Interest paid by the assessee on such account cannot be allowed. The only plea of the assessee is that the assessee had mortgaged its property to avail bank loans for the sister concerns and if the sister concerns failed in their business, it will effect the profitability of the assessee - assessee has not produced an iota of evidence to prove that it has mortgaged its property, and on its classification of funds as NPA, it would affect the assessee's profitability. We are not in a position to uphold the argument of the Ld. AR on this issue. Judgment as relied on by the Ld. AR in the case of Munjal Sales Corporation v. CIT 2008 (2) TMI 19 - SUPREME COURT cannot be applied to the facts of the assessee's case. In that case, the issue was with regard to allowability of interest u/s. 36(1)(iii) subject to provisions of section 40(b)(iv) - Decided against assessee.

Summary

Issues:
1. Disallowance u/s 36(1)(iii) of a sum of ?8,35,805 - commercial expediency and own funds.
2. Interpretation of "for the purpose of business" under section 36(1)(iii) of the I.T. Act.
3. Lack of commercial expediency for advances to sister concerns.
4. Appeal against the order of CIT(A) confirming disallowance of interest expenses.

Analysis:
1. The issue of disallowance u/s 36(1)(iii) of ?8,35,805 was raised by the assessee against the order of CIT(A) based on the grounds of commercial expediency and own funds. The Assessing Officer disallowed interest expenses on loans to sister concerns due to lack of commercial expediency. The CIT(A) upheld this decision, stating that the loans had no commercial expediency impact on the assessee's income. The Tribunal noted the lack of evidence provided by the assessee to support commercial expediency, leading to the disallowance of interest expenses.

2. The interpretation of "for the purpose of business" under section 36(1)(iii) was crucial in this case. The Assessing Officer emphasized that the language of the Act should not be stretched beyond its intended scope. The Tribunal highlighted the need for establishing the purpose of loans as business-related to claim deductions under this section. The High Court remitted the issue back to the Assessing Officer for further examination based on the availability of own funds and commercial expediency.

3. The lack of commercial expediency for advances to sister concerns was a key point of contention. The Tribunal emphasized the necessity of proving the benefit derived from such transactions and the financial position of the sister concerns. The absence of evidence regarding the purpose and impact of the loans on the business expediency led to the dismissal of the appeal by the assessee.

4. The appeal against the order of CIT(A) confirming the disallowance of interest expenses was based on arguments of commercial expediency and precedent judgments. The Tribunal considered various case laws and the lack of evidence provided by the assessee to support the claim of commercial expediency. The reliance on Supreme Court judgments was deemed inapplicable to the facts of the present case, leading to the dismissal of the appeal.

In conclusion, the Tribunal dismissed the appeal of the assessee due to the failure to establish commercial expediency and the lack of evidence supporting the purpose of loans to sister concerns. The judgment emphasized the importance of providing detailed cash flow statements and substantiating claims of commercial expediency to justify deductions under section 36(1)(iii) of the Income Tax Act.