2021 (7) TMI 1020 - AT - Income Tax

Disallowance of the interest expenditure on the loan taken by the assessee - HELD THAT - In this case, while the loan was granted to a third-party real estate developer M/S. ABW Infrastructure with strategic intent, the loan per se was for the purpose of earning interest income in terms of Agreement for effective and secured deployment of interest-bearing funds, which did not result in acquiring any controlling interest in M/S. ABW Infrastructure. In the absence of any finding that the loan from M/s. OIPL on which interest expense has been incurred, was used for personal purposes of the assessee, keeping in view the proximity of time in obtaining loan from OIPL for the immediate necessity of meeting the expenditure for conversion of land uses and also other business prospects, and in lending the idle funds to M/s M/S. ABW Infrastructure for the purpose of earning of interest on the idle funds at the same rate of interest at which the loan was obtained. The transactions are driven by business considerations and are part of the commercial expediency, we are of the considered opinion that the disallowance of interest expense on loan taken for purposes of business and against which interest income has been earned and offered to tax is unwarranted and the same qualifies to be allowed u/s.36(1)(iii)/S.37(l). We find equal strength in the argument of the ld. AR and hold that even in the alternative, such an expense qualifies as a deduction u/s.57(iii) against the interest income offered to tax, being an expenditure incurred in relation to earning of the said income as the loan was taken from M/s. OIPL and then given to M/S. ABW Infrastructure. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest expenditure on the loan taken by the assessee.
2. Commercial expediency of the loan transactions.
3. Allowability of interest expenditure under sections 36(1)(iii), 37(1), and 57(iii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The assessee, M/s Mason Infrastructure Private Limited, engaged in real estate activities, filed its return for the assessment year 2013-14. The Assessing Officer disallowed the interest expenditure of ?1,35,25,521/- on the loan taken from Orris Infrastructure Private Limited (OIPL) on the grounds that the assessee failed to prove the business use of the loan. The assessee had lent ?17 crores to M/s ABW Infrastructure at the same interest rate of 18% per annum, which was also offered to tax.

2. Commercial Expediency of the Loan Transactions:
The assessee argued that the loan from OIPL was for business purposes, including the development of a 11.74-hectare land in Rajasthan and other real estate projects. The loan to M/s ABW Infrastructure was a strategic business decision to utilize idle funds and earn interest income. The assessee emphasized that the term "commercial expediency" is broad and should be interpreted in the context of the business environment. The Revenue contended that the assessee acted as a pass-through entity with no real business necessity for the loan.

3. Allowability of Interest Expenditure:
The Tribunal examined whether the interest expenditure met the criteria under sections 36(1)(iii) and 37(1) of the Income Tax Act. The Tribunal referred to several judicial precedents, including the Supreme Court's decision in S.A. Builders Ltd., which emphasized that "commercial expediency" includes expenditure incurred voluntarily for business purposes, even if a third party benefits. The Tribunal noted that the loan to M/s ABW Infrastructure was for earning interest income and was a strategic business decision.

The Tribunal also considered the alternative argument that the interest expenditure could be allowed under section 57(iii) as it was incurred to earn interest income from M/s ABW Infrastructure.

Conclusion:
The Tribunal concluded that the loan transactions were driven by business considerations and commercial expediency. The interest expenditure of ?1,35,25,521/- was allowable under sections 36(1)(iii) and 37(1) of the Income Tax Act. Even alternatively, the expenditure qualified as a deduction under section 57(iii) against the interest income of ?1,48,38,906/- offered to tax. The Tribunal directed the Assessing Officer to delete the disallowance of the interest expenditure.

Order:
The appeal of the assessee was allowed, and the disallowance of the interest expenditure on the loan was directed to be deleted. The order was pronounced on July 23, 2021.