2022 (6) TMI 559 - AT - Income Tax

Interest expenses u/s 36(1)(iii) - Addition of interest component considering that there is no commercial expediency in lending to sister concerns - as per AO assessee has obtained loans at higher rate of interest and the same was provided to the sister concerns at lower rates - HELD THAT - The main objects of the assessee s business is real estate development and construction activities. The assessee has obtained these loans for the purpose of providing advances to the sister concerns, where the construction projects are in progress and the assessee is able to substantiate the commercial expediency as the main objects of the assessee is not to earn interest, but to engage in real estate and construction activities. Therefore the action of the CIT(A) that there is no commercial expediency is not tenable and is not supported with any findings except relying on the facts that the higher rate of interest has been paid on loans borrowed. AR explained the accounting concept on the weighted average rate of interest considering the variability of interest rate range from @8.75% to 16% though this approach cannot be incorporated in the audited financial statements but the reasonableness and explanations to provide the loans to sister concerns cannot be over looked and the group transfers between one sister concern to another sister concern as per requirement of funds. The Ld.AR submissions are realistic and duly supported by the material information and is appreciated. Accordingly, we do not find merits in the findings of the CIT(A) and we rely on the judicial decisions and commercial expediency explained by the Ld.AR that the assessee s business activities as a going concern and the construction projects are in progress. Any delay in project construction activities due to financial crunch will increase the overheads of the projects. Accordingly, we set aside the order of CIT(A) on this disputed issue and direct the Assessing officer to delete the addition and allow the grounds of appeal of the assessee.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act.
2. Addition of excess depreciation claim and interest on late payment of TDS.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii) of the Income Tax Act:

The primary issue revolves around the disallowance of Rs. 14,65,098/- out of interest expenses claimed by the assessee under Section 36(1)(iii) of the Income Tax Act. The assessee, engaged in real estate construction and development, had borrowed funds at varying interest rates (8.74% to 16%) and provided loans to sister concerns at a slightly lower rate (15.45%). The Assessing Officer (A.O.) disallowed the differential interest, citing a lack of commercial expediency in lending to sister concerns at lower rates. The A.O. calculated the differential interest rate at 0.55% and disallowed the corresponding amount. The CIT(A) upheld this disallowance.

During the appellate proceedings, the assessee argued that the loans were borrowed and utilized for business purposes, and the weighted average borrowing cost was 15.42%, which justified the interest rate charged to sister concerns. The assessee supported its claim with judicial precedents, including the Supreme Court's decision in Hero Cycles (P) Ltd vs CIT and S.A. Builders Ltd vs CIT, which emphasized the broader interpretation of "for the purpose of business" and upheld the right of businesses to make decisions based on commercial expediency.

The Tribunal noted that the assessee's business involved real estate development, requiring substantial funds, often borrowed at varying rates. The funds were then advanced to sister concerns engaged in construction projects, demonstrating commercial expediency. The Tribunal found the CIT(A)'s reasoning flawed and unsupported by adequate findings. It acknowledged the assessee's method of calculating the weighted average cost of borrowing and the business necessity of providing loans to sister concerns. Consequently, the Tribunal set aside the CIT(A)'s order and directed the A.O. to delete the addition, allowing the assessee's appeal.

2. Addition of Excess Depreciation Claim and Interest on Late Payment of TDS:

The second issue involved the A.O.'s addition of excess depreciation claim amounting to Rs. 12,59,835/- and interest on late payment of TDS. The A.O. assessed the total loss at Rs. 1,01,95,320/- after making these additions. The CIT(A) granted partial relief to the assessee on these grounds.

However, as the facts and circumstances of the appeal for A.Y. 2014-15 were identical to those of A.Y. 2013-14, the Tribunal applied the same reasoning and decision to this appeal as well. Consequently, the Tribunal allowed the grounds of appeal in favor of the assessee for A.Y. 2014-15.

Conclusion:

The Tribunal, after considering the facts, submissions, and judicial precedents, allowed both appeals filed by the assessee. The Tribunal directed the deletion of the disallowance of interest expenses under Section 36(1)(iii) and the addition of excess depreciation claim and interest on late payment of TDS. The order was pronounced in the open court on 23/05/2022.