2022 (5) TMI 1378 - AT - Income Tax

Disallowance u/s 36(1)(iii) - commercial expediency to give no interest loans - assessee has extended substantial amount as loan to one of its director during the financial year, and not charged interest on the loan amount - HELD THAT - Though the assessee s claim that payment made to the Director, Shri Kamal Deshraj Dogra was for business expediency, but the assessee could not prove before us the nexus between the assessee-company with its subsidiary company in the nature of trade and business. Furthermore, Shri Kamal Deshraj Dogra being director of both the companies, payments made directly to the common director of the company is not established with proper material on hand for the socalled business exigency. Thus, the assessee s arguments that there was a running account with the sister concern viz. Kamal Freight Pvt.Ltd., which was not demonstrated any business expediency between the assessee company with that of its subsidiary company. In the above circumstances, we do not find any infirmity in the order passed by the lower authorities, more particularly, the ld.CIT(A) has clearly held that judgement of S.A. Builders facts 2006 (12) TMI 82 - SUPREME COURT is not applicable to the assessee s case. Punjab Haryana High Court in the case of C.R. Auluck Sans P.Ltd., 2014 (2) TMI 73 - PUNJAB AND HARYANA HIGH COURT has also upheld disallowance made under section 36(1)(iii) of the Act on the ground that the assessee has failed to establish commercial expediency in doing the financial transactions. Thus, we have no hesitation in upholding the order of the CIT(A), and this ground raised by the assessee are hereby rejected, accordingly, appeal filed by the assessee is dismissed.

Summary

Issues:
Disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961 based on loans provided to a director for non-business purposes.

Detailed Analysis:

1. Background and Assessment by AO:
The assessee, a closely held company, filed its return for the Asst. Year 2015-16, declaring income. During scrutiny, the AO noted interest expenses claimed on unsecured loans given to a director for non-business purposes. The AO issued a show cause notice for disallowance under section 36(1)(iii) of the Act. The assessee claimed the loans were for business purposes, but the AO disallowed a proportionate interest amount.

2. Appeal to CIT(A) and Decision:
The assessee appealed to the CIT(A), citing the S.A. Builders case to argue against disallowance. However, the CIT(A) upheld the disallowance, stating the assessee failed to establish commercial expediency. Referring to relevant High Court decisions, the CIT(A) dismissed the appeal.

3. Tribunal Hearing and Decision:
The assessee appealed to the Tribunal, challenging the disallowance of interest expenses. During the hearing, certain grounds were dismissed as not pressed, focusing on the disallowance issue. The assessee argued for commercial expediency based on a land purchase agreement. However, the Department contended that no evidence supported the business purpose claim.

4. Tribunal's Ruling:
The Tribunal reviewed arguments from both sides but found the assessee failed to prove a valid business connection for the loans provided to the director. The Tribunal noted the lack of evidence establishing a business nexus between the companies involved. Upholding the CIT(A)'s decision, the Tribunal rejected the appeal, citing precedents where disallowances were upheld due to the failure to demonstrate commercial expediency.

5. Conclusion:
The Tribunal dismissed the assessee's appeal, affirming the disallowance of interest expenses under section 36(1)(iii) of the Act. The decision emphasized the importance of proving commercial expediency in financial transactions to avoid disallowances. The judgment serves as a reminder of the necessity to substantiate business purposes for transactions involving directors or related entities to comply with tax regulations.