2021 (9) TMI 1162 - AT - Income Tax

Allowability of financial charges including interest expenditure - interest free loans granted to subsidiary companies - AO has disallowed interest expenditure claimed by the assessee u/s.37(1) stating that the loan funds are utilized for the purpose of investment in equity shares, Interest free loans and advances and not for the purpose of assessee's business - HELD THAT - We observe from the financial statements of the assessee that it has given loans and advances and invested in shares of the related parties and to others from its own funds as well as from the borrowed funds. From the entire arguments of assessee, we find that it was unable to quantify the amount of borrowed funds which have been utilized for other than the business purposes of the assessee. AR could not controvert the submissions/observations of the ld. DR in regard to both the issues i.e. commercial expediency and to meet the particular financial requirements of SPVs. Further, he was also unable to controvert the regarding revenue receipts, which are extraordinary receipts compared to the expenditure incurred by the assessee. Assessee has given interest free loans/advances from interest bearing account which was not a debit balance i.e. loan funds have been utilized for advancing to its subsidiary, fellow subsidiary ultimate holding co. and to others. Assessee was unable to establish the use of the funds for business purposes as per the decision relied on by the ld. AR of the assessee. He also unable to establish the commercial expediency as observed supra, in all the years the assessee has not received any dividend or interest income and has not produced any agreements between / amongst the companies to whom the loans and advances were made and what was the purpose for giving loans and advances. The assessee failed to produce documentary evidences, the end use of funds invested in subsidiary, fellow subsidiary, ultimate holding company and to others. We also do not find any weightage on the submission of the ld. AR of the assessee that assessee had sufficient own funds for giving loans and advances and invested in shares and further, could not produce the availability of own funds on the date investments in shares and giving loans and advances on the particular date of investments. Thus the disallowance of interest made by the AO is justified and accordingly, we set aside the order of the CIT(A) and restore the order of AO in all the appeals under consideration. Thus, the grounds raised by the revenue in all the appeals, on this issue are allowed.

Issues Involved:
1. Delay in filing appeals.
2. Allowability of financial charges as business expenditure.
3. Nexus between borrowed funds and business purpose.
4. Application of the SA Builders case.

Detailed Analysis:

1. Delay in Filing Appeals:
The Revenue's appeals in ITA No. 1745/Hyd/2016 suffered from a 235-day delay, and ITA Nos. 1120 & 1121/Hyd/2017 had a 23-day delay. The delay was attributed to the late receipt of the authorization letter from the Office of the Pr. CIT – 2, Hyderabad. Citing the cases of Collector Land Acquisition vs. Mst. Katiji & Ors and University of Delhi Vs. Union of India, it was held that the delay, supported by cogent reasons, deserved to be condoned to ensure substantial justice. The delay was therefore condoned, and the cases were taken up for adjudication on merits.

2. Allowability of Financial Charges as Business Expenditure:
The assessee company, engaged in setting up infrastructure facilities for power plants, claimed a loss of ?19,40,95,019/- for AY 2011-12. The AO disallowed financial charges of ?19,54,03,339/-, resulting in a positive income of ?13,08,320/-. The CIT(A) deleted the disallowance, observing that the assessee's objective was to develop and support power projects, earning income through management consultancy fees and interest income. The CIT(A) noted that the assessee's business model involved investing in equity and advancing loans to meet financial requirements of Special Purpose Vehicles (SPVs). The CIT(A) also pointed out that the AO had allowed similar claims in other assessment years and that the non-earning of income in a particular year should not render the related expenditure disallowable under Section 37(1) of the Act.

3. Nexus Between Borrowed Funds and Business Purpose:
The AO contended that the borrowed funds were utilized for investments in equity shares and interest-free loans, not for business purposes. The CIT(A) disagreed, stating that the borrowed funds were used for the assessee's business model, which included providing financial support to SPVs. The CIT(A) emphasized that the law does not require that expenditure must result in income to be allowable. The CIT(A) referred to the Supreme Court's decision in Rajendra Prasad Moody's case, which held that earning of income is not a precondition for the allowability of expenditure under Section 37(1).

4. Application of the SA Builders Case:
The CIT(A) applied the Supreme Court's decision in SA Builders, which held that interest on borrowed funds is allowable if the funds are advanced to a sister concern for commercial expediency. The CIT(A) found that the assessee's financial support to SPVs was commercially expedient and thus allowable as business expenditure. The CIT(A) also noted that similar disallowances were deleted in the preceding assessment year (AY 2010-11) based on the same principles.

ITAT's Decision:
The ITAT considered the rival submissions and the material on record. The ITAT observed that the assessee failed to establish a clear nexus between the borrowed funds and the business purpose. The ITAT noted that the assessee could not quantify the amount of borrowed funds used for non-business purposes and failed to provide sufficient evidence of commercial expediency. The ITAT also pointed out discrepancies in the assessee's financial statements, such as the lack of fixed assets and low expenditure on professional services and salaries compared to the income earned from consultancy services. The ITAT concluded that the disallowance of interest by the AO was justified and set aside the CIT(A)'s order, restoring the AO's disallowance of interest in all the appeals under consideration.

Conclusion:
The ITAT allowed the revenue's appeals, upholding the AO's disallowance of interest on borrowed funds. The ITAT emphasized the need for the assessee to establish a clear nexus between the borrowed funds and business purposes and to provide evidence of commercial expediency. The decision was pronounced in the open court on 30th August 2021.

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