2021 (5) TMI 632 - AT - Income Tax

Addition of interest expense - Allowability of interest paid on borrowed capital where interest bearing funds have been advanced interest free to the sister concern - transactions of taking money on loan and giving them as advance or loan for interest is being carried out regularly round the year - HELD THAT - It is a well known fact that in banking industries also per annum rates of interest on Fixed Deposit normally range between 5% to 7% whereas for the cash credit loans and other business loans the banks are charging much higher interest. There cannot be a straight jacket formula that if unsecured loan is taken @12% per annum one will have to charge interest more than 12% on loan given. The same may or may not happen. It is up to the businessmen to take a wise decision at the given point of time and the risk involved in giving loan on interest. In finance business, one is concerned to earn profits but major concern is of receiving the principle amount back as and when due to be received. In the instant case the transactions of taking money on loan and giving them as advance or loan for interest is being carried out regularly round the year. It shows that interest paid on secured and unsecured loan is wholly and exclusively for the business purpose of earning income from loans and advances. The allowability of interest paid on borrowed capital where interest bearing funds have been advanced interest free to the sister concern was deliberated upon by the Hon ble Supreme Court in S.A. Builders 2006 (12) TMI 82 - SUPREME COURT In the instant case firstly there is a clear nexus of interest paid against the income received during the year, the transactions carried out by the assessee are for the commercial expediency and for this purpose the rate of interest paid and received by the assessee are varying from case to case which is duly evident from the records placed before us and the audited financial statements. The action of Ld. A.O was not justified in taking up few out of many advances given by the assessee to arbitrarily levy interest rate on loan given at an agreed rate of interest which may be lower than the interest rate charged from other persons or no interest is charged for commercial expediency purposes. We thus set aside the finding of Ld. CIT(A) and delete the disallowance of interest - Decided in favour of the assessee.

Summary

Issues Involved:
1. Confirmation of disallowance of interest expenses by the Assessing Officer (AO) for Assessment Years 2013-14 and 2014-15.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance of Interest Expenses by AO:
The primary issue in both appeals is the confirmation of disallowance of interest expenses by the Assessing Officer (AO) for Assessment Years 2013-14 and 2014-15. The AO disallowed the interest expenses on the grounds that the assessee paid interest at higher rates (12% to 15%) on borrowed funds but charged lower interest rates (6%) or no interest on loans advanced to certain parties.

Facts and Submissions:
The assessee, engaged in the money lending business, argued that the disallowance was unjustified. The assessee maintained that the business decisions, including the rates of interest charged and paid, were made based on commercial expediency and business prudence. The assessee provided detailed charts showing interest paid and received, emphasizing that the rates varied based on specific circumstances and the safety of investments.

Tribunal's Observations and Findings:
The Tribunal noted that the assessee's business involved regular transactions of taking and giving loans, with interest rates varying from 6% to 18%. The Tribunal emphasized that the genuineness of other interest expenses and receipts was not doubted by the Revenue. The Tribunal observed that the assessee maintained regular books of accounts, audited under section 44AB of the Income Tax Act, and enjoyed overdraft facilities from banks.

The Tribunal highlighted that the concept of "commercial expediency" allows for business decisions that may not always aim to maximize profits but ensure the safety and return of the principal amount. The Tribunal referred to the Supreme Court's judgment in S.A. Builders Ltd. vs. CIT, which stated that interest on borrowed funds used for advancing interest-free loans to sister concerns is allowable if done for commercial expediency.

Conclusion:
The Tribunal concluded that the assessee's transactions were carried out for business and commercial expediency, justifying the varying interest rates. The Tribunal found that the AO's action of arbitrarily disallowing interest expenses based on a few transactions was unjustified. Accordingly, the Tribunal set aside the findings of the CIT(A) and deleted the disallowance of interest expenses for both assessment years.

Result:
Both appeals of the assessee were allowed, and the disallowance of interest expenses for Assessment Years 2013-14 and 2014-15 was deleted.

Pronouncement:
The order was pronounced as per Rule 34 of ITAT Rules, 1963 on 30.04.2021.