2020 (11) TMI 39 - HC - Income Tax

Disallowance u/s.36(1)(iii) - allegation that assessee had advanced interest bearing funds without charging any interest - whether matching principle in terms of income and expenditure is not applicable when cash method of accounting is followed as the sine qua non for allowability of expenditure is the nexus between the income and expenditure reported for the year in question as applicable in terms of Section 36 and 37 - HELD THAT - As decided in M/S. SHRIRAM INVESTMENTS 2019 (4) TMI 570 - MADRAS HIGH COURT no substantial question of law arises in the present case, because, it is essentially a finding of fact as to whether the lower interest paid on the borrowings made by the assessee company from the sister concerns or the group companies is for the purpose of its business or not. Whether it is commercially expedient or not for the Assessee cannot be decided by the Revenue authorities and unless a decision taken in the usual course of business by the Assessee can be held to be arbitrary or motivated, deliberately taken to defeat the purpose of the Revenue, it cannot be held that the lower interest rate paid to the borrowers on the borrowings made by the assessee company is disallowable u/s 36 (1) (iii). Tribunal, in our opinion, rightly held that when the cash system of accounting was adopted by the Assessee, an Investment Company, whose business is only to borrow and lend or invest, the same cannot be said to be not in the business interest or commercially expedient for the purpose of business and the concept of 'Matching Principles', which has been applied by the Assessing Authority and the CIT (A) in the present case, was not really applicable. Revenue authorities to substitute their own wisdom or notion about the rate of interest agreed to between the parties, including the group companies and, as such, the finding of fact about commercial expediency or absence thereof is a finding of fact, out of which, no substantial question of law can be said to be arising, requiring our consideration u/s 260A. - Decided against revenue.

Summary

Issues:
- Disallowance made under Section 36(1)(iii) of the Income Tax Act
- Application of matching principle in terms of income and expenditure

Issue 1: Disallowance under Section 36(1)(iii) of the Income Tax Act
The appeal filed by the assessee challenges the order of the Income Tax Appellate Tribunal regarding the disallowance made under Section 36(1)(iii) of the Income Tax Act for the assessment year 2012-13. The key question raised is whether the Tribunal was correct in deleting the disallowance when the assessee had advanced interest-bearing funds without charging any interest. The decision of the Court in the assessee's own case in a previous assessment year supported the deduction under Section 36(1)(iii) irrespective of whether the borrowed capital was used for revenue or capital assets. The Court emphasized that the nature of the expense, whether on capital or revenue account, was irrelevant for claiming deduction under this section. The judgment cited various precedents to support the allowance of interest paid on capital borrowed for business purposes. The Court further highlighted that the commercial expediency of advancing money to a sister concern is crucial in determining the disallowance under Section 36(1)(iii). Ultimately, the Court dismissed the appeal, upholding the findings of the lower authorities and emphasizing that the decision on commercial expediency is a factual determination that does not raise a substantial question of law.

Issue 2: Application of Matching Principle
The second substantial question of law pertains to whether the Tribunal erred in not considering the applicability of the matching principle when the cash method of accounting is followed. The Court reiterated that the concept of 'Matching Principles' was not applicable in the case of an Investment Company following the cash system of accounting. It emphasized that the Revenue authorities should not interfere with the interest rate agreed upon between parties, including group companies. The Court held that the determination of commercial expediency is a factual finding and not a question of law. The Court relied on its previous decision in the assessee's case and dismissed the Revenue's appeal, maintaining consistency with the earlier judgment. Consequently, the Court upheld the Tribunal's decision and dismissed the appeal filed by the Revenue.

In conclusion, the High Court of Madras upheld the Tribunal's decision, emphasizing the factual nature of determining commercial expediency and the inapplicability of the matching principle in certain contexts. The judgment provided detailed legal reasoning and cited relevant precedents to support the dismissal of the Revenue's appeal.