2021 (5) TMI 408 - AT - Income Tax

Interest free advances given by the assessee to its group concerns - CIT (A) who deleted the addition made by the AO by observing that the interest free loans and advances were extended as a measure of commercial expediency - no loss to the Revenue for not charging interest by the assessee from the group concerns as the assessee and other group concerns were paying the taxes at the maximum marginal rate - whether the interest free advances were given by the assessee to its group concern as a measure of commercial expediency? - HELD THAT - The group concern of the assessee have rendered services to the assessee in the year under consideration as well as in the immediate preceding year. The debit notes/invoice issued by these parties are placed on sample basis. Thus from the above, it is clear that the advances were extended by the assessee to the group concern as a measure of commercial expediency. In addition to the above we also find that the assessee and its group concerns were paying the taxes at the maximum marginal rate as evident from the income tax acknowledgements of its group companies. Accordingly we hold that there was no loss to the revenue for not charging interest on the amount extended by the assessee as interest-free loan to its group companies. As decided in DELOITTEE HASKINS SELLS, AHMEDABAD. 2019 (10) TMI 349 - ITAT AHMEDABAD once it is established that there is nexus between the expenditure and the purpose of business, the revenue cannot assume the role to decide as to how much is reasonable expenditure. Apart from this, the Ld. first appellate authority has also noted that the assessee firm had its own funds which were more than the amount of advances given therefore, there was no occasion for the assessing officer to make disallowance on account of interest - Decided in favour of assessee. TDS u/s 194I or 194C - short deduction of TDS - Addition u/s 40(a)(ia) - payments to the Hotels either without deducting the TDS or deducted TDS at the rate lower than the rate prescribed under the Act - HELD THAT - The assessee in the case on hand has deducted the taxes and also deposited the same but as per the AO same is deducted in wrong section resulting in short deduction. However there the assessee cannot be held in default under section 40(a)(ia) of the Act. Provisions of TDS with respect to the room charges will be applicable where the hotel accommodation was taken on regular basis. The CBDT in its circular number 05 of 2002 dated 30-07-2002 has clarified that where the rooms have been earmarked for a specified rate and for the specified period, then it shall be construed as accommodation available on regular basis. However in the case on hand there is nothing coming from the order of the AO suggesting that the rooms have been earmarked by the assessee for a specified period and specified rate. We hold that there cannot be any disallowance on account of non-deduction of TDS under section 194-I of the Act. Hence we uphold the finding of the learned CIT (A). Thus the ground of appeal of the Revenue is dismissed

Summary

Issues Involved:
1. Deletion of addition made by AO on account of interest-free advances given by the assessee to its group concerns.
2. Deletion of addition made by AO for non-deduction of TDS under section 194-I r.w.s. 40(a)(ia) of the Act.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Interest-Free Advances:

The Revenue contended that the CIT(A) erred in allowing the interest of ?1,92,18,117/- as business expenditure, ignoring that the AO had disallowed this interest on the grounds that the assessee provided interest-free loans to its group concerns. The AO argued that the assessee diverted its interest-bearing funds to provide these interest-free loans, resulting in a proportionate disallowance of interest expenses.

The CIT(A) deleted the addition, observing that the interest-free loans were extended as a measure of commercial expediency. The CIT(A) noted that both the assessee and its group concerns were paying taxes at the maximum marginal rate, implying no loss to the Revenue. The Tribunal upheld the CIT(A)'s decision, emphasizing that the concept of "commercial expediency" includes expenditures a prudent businessman incurs for business purposes, even if not legally obligated. The Tribunal also referenced a Memorandum of Understanding (MOU) between the assessee and its group concern, which demonstrated that services were rendered, supporting the commercial expediency of the advances.

The Tribunal cited the case of DCIT vs. Deloitte Haskins & Sells, where similar facts led to a decision in favor of the assessee. It concluded that the interest-free advances were justified as a measure of commercial expediency, and there was no loss to the Revenue since both entities paid taxes at the same rate.

2. Deletion of Addition for Non-Deduction of TDS:

The Revenue argued that the CIT(A) erred in deleting the disallowance of ?1,07,83,531/- for non-deduction of TDS under section 194-I. The AO disallowed payments made to hotels, claiming the assessee failed to deduct TDS at the appropriate rate for banquet and room rental charges.

The CIT(A) found that the assessee had deducted TDS at 2% for banquet charges under section 194C, which was not a case of non-deduction but short deduction. For room rental charges, the CIT(A) held that the provisions of section 194-I apply only to accommodations taken on a regular basis, which was not the case here. The CIT(A) relied on CBDT Circular No. 5/2002, clarifying that rate-contract agreements do not constitute regular accommodation.

The Tribunal upheld the CIT(A)'s decision, referencing the Calcutta High Court's judgment in CIT vs. S.K. Tekriwal, which held that short deduction of TDS does not warrant disallowance under section 40(a)(ia). The Tribunal also cited the Bombay Tribunal's decision in Red Chillies Entertainment Pvt. Ltd vs. CIT, which supported the view that TDS provisions under section 194-I do not apply to occasional room rentals.

The Tribunal concluded that the assessee's payments to hotels did not require TDS under section 194-I, and the CIT(A) correctly deleted the disallowance. The appeal filed by the Revenue was dismissed.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The interest-free advances were deemed commercially expedient, and the payments to hotels did not necessitate TDS under section 194-I. The Tribunal's detailed analysis emphasized the principles of commercial expediency and the proper application of TDS provisions.