2022 (2) TMI 862 - AT - Income Tax

Disallowing interest payment on loan - Assessee failed to provide proofs and evidences thereof to support the utilization of such loan so that the interest paid can be treated as an eligible deduction - Assessee had failed to furnish justification as to on which account the interest was actually incurred in the year and also failed to submit the utilization of loan and why such interest was not paid or credited to the account of Matrix Cellular Services International in earlier years - HELD THAT - As was the case during assessment proceedings, even during the appellate proceedings the assessee has failed to establish the nexus of the loan taken with the business - As submitted that the assessee company has earned interest income on loan and advances - interest on such loans and advances is less than 5%, whereas interest has been paid almost @10% on the loan taken - assessee has also failed to demonstrate the fund flow for paying of the loan on taking the loan from director. No cogent evidence has been submitted as to how the loan taken as well as the loan given was for business purposes. Payment of interest on the loans which have not been proved to be for business purpose and the waiver of the loan are not interrelated but are mutually exclusive In the instant case, the expenditure of interest for which the loan has been received has not been shown to be for the purpose of the business. We are not swayed by the observation of the Assessing Officer that earlier year, no interest has been paid but interest has been paid in the current year only. Even, before us, no evidences have been provided to prove that the loan received earlier was utilized for the business purpose which makes the interest paid or payable allowable under the provisions of Section 36(1)(vii). The arguments that there was no outgoing fund on the contrary, the assessee was a net gainer in form of waiver cannot be considered as a tenable claim.- Decided against assessee.

Issues Involved:
1. Disallowance of interest payment of ?96,98,713/- on loan from Matrix Cellular International Services Ltd.
2. Questioning the decision of not paying interest in earlier years but paying the same for the current year.
3. Ignoring the waiver of ?6,61,33,424/- by Matrix Cellular International Services Ltd.
4. Ignoring the business purpose of the interest payment.
5. Ignoring the agreement for waiver of interest up to F.Y. 2013-14.

Detailed Analysis:

1. Disallowance of Interest Payment:
The assessee filed an appeal against the disallowance of ?96,98,713/- paid as interest on a loan from Matrix Cellular International Services Ltd. The Assessing Officer (AO) noted that the loan was initially interest-free and no interest was claimed in previous years. The AO questioned why interest was charged only for the year 2014-15 and not earlier, suspecting that the interest was not actually paid but only adjusted through book entries. The AO concluded that the assessee failed to establish the utilization of the loan for business purposes and disallowed the interest under Section 36(1)(iii).

2. Questioning the Decision of Not Paying Interest in Earlier Years:
The AO questioned the inconsistency in the assessee’s decision to pay interest in the current year while no interest was charged in previous years. The assessee explained that interest was waived by Matrix Cellular International Services Ltd. until March 2014 due to the lack of business income in prior years. However, the AO was not convinced and noted that the assessee failed to provide evidence of the loan’s utilization for business purposes.

3. Ignoring the Waiver of ?6,61,33,424/-:
The assessee argued that paying the interest of ?96,98,713/- resulted in a waiver of ?6,61,33,424/- from Matrix Cellular International Services Ltd., which was beneficial and shown as income. The AO, however, focused on the requirement to prove the business purpose of the loan and its utilization, which the assessee failed to demonstrate.

4. Ignoring the Business Purpose of the Interest Payment:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] both held that the assessee failed to establish a direct nexus between the loan taken and its utilization for business purposes. The assessee’s argument that the interest payment was for business purposes and beneficial due to the loan waiver was not substantiated with adequate evidence.

5. Ignoring the Agreement for Waiver of Interest up to F.Y. 2013-14:
The assessee referred to an agreement with Matrix Cellular International Services Ltd. that waived interest up to F.Y. 2013-14. Despite this, the AO and CIT(A) noted that the assessee did not provide sufficient evidence to demonstrate the business purpose of the loan and the necessity of the interest payment for the current year.

Conclusion:
The Tribunal considered the assessment order and submissions from both parties. It noted that the assessee failed to establish the nexus between the loan taken and its business purpose. The Tribunal referenced case law, including CIT Vs. Dhanrajgirji Raja Narasinghgirji and Dalmia Cement, emphasizing that the expenditure must be proven to be for business purposes. The Tribunal upheld the disallowance of the interest payment, agreeing with the AO and CIT(A) that the assessee did not provide sufficient evidence to support the claim. Consequently, the appeal of the assessee was dismissed.

← Previous Next →