2022 (10) TMI 605 - AT - Income Tax

Disallowance of interest on loan advanced to the sister concern of the assessee - why disallowance under section 36(i)(iii) of the Income Tax Act should not be done in respect of interest deduction claimed on borrowed fund as it was not utilized for the business of the assessee but was used for advancing interest free loan to the sister concerns? - HELD THAT - it is clear that the AO has stated the fact that the assessee advanced the interest free loan to the sister concerns which was disbursed from PNB term loan account. This fact has not been disputed by the assessee as the amount was disbursed directly from PNB loan account. Therefore, the contention of the assessee that the assessee was having sufficient interest free fund for advancing the loan to the sister concerned is contrary to the facts on record. Even otherwise, this fact of advancing the loan to the sister concerns from the PNB term loan is based on independent evidence of term loan account of the assessee with PNB. Interest free loan was advanced to the sister concerned for business purpose and commercial expediency - Giving deep thought on the contention of the assessee regarding the commercial expediency for granting interest free loan to the sister concerns but we could not find a single fact in support of the said contention of the assessee. The assessee has not uttered a single word before the AO as well as before the CIT(A) to show that there were business transactions between the assessee and these two sister concerns which has necessitated to advance interest free loan to the sister concerns. Therefore, in the absence of any reference to any business transaction between the assessee and the sister concerns, the plea of commercial expediency cannot be accepted. The assessee has miserably failed to establish a case of commercial expediency or business exigency in granting interest free loan to the sister concerns by utilizing the borrowed fund. As decided in SA BUILDERS LTD. VERSUS COMMISSIONER OF INCOME-TAX 2006 (12) TMI 82 - SUPREME COURT held that if the interest free loan given to the sister concern has been advanced as a measure of commercial expediency, than the interest on the borrowed fund used for advancing the loan to the sister concern is an allowable deduction. However, it is also made clear that it does not mean that in every case, interest on borrowed fund has to be allowed if the assessee advances to the sister concern. It all depends on the facts and circumstances of the respective case. Therefore, the said decision of Hon ble Supreme Court would not help the case of the assessee when the assessee has not brought any fact on record to establish that there was a commercial expediency or business exigency in advancing the interest free loan to the sister concerns. In view of the above discussion and having regard to the facts and circumstances of the case, we do not find any error or illegality in the impugned order of the CIT(A). Issue for the assessment year 2013-14 is identical and also based on the identical facts being the same amount of loan and advances for Assessment Year 2012-13 was continue for the next assessment year. Accordingly, the solitary common issue is decided against the assessee.

Issues Involved:
1. Disallowance of interest on loans advanced to sister concerns.
2. Whether the loans were made out of interest-bearing funds.
3. Commercial expediency of the loans.
4. Additions based on hypothetical situations.
5. Charging of interest under Section 234A of the Income Tax Act.

Detailed Analysis:

Disallowance of Interest on Loans Advanced to Sister Concerns:
The primary issue in these appeals for the assessment years 2012-13 and 2013-14 is the disallowance of the claim of deduction of interest for advancing interest-free loans to sister concerns. The Assessing Officer (AO) issued a show-cause notice to the assessee regarding the disallowance under Section 36(1)(iii) of the Income Tax Act, arguing that the borrowed funds were not utilized for the assessee's business but were used for advancing interest-free loans to sister concerns. The AO made a disallowance of Rs. 12,10,134/- as proportionate interest expenditure. The assessee's contention that the loans were for commercial expediency was not accepted by the AO or the Commissioner of Income Tax (Appeals) [CIT(A)].

Whether the Loans Were Made Out of Interest-Bearing Funds:
The AO found that the interest-free advances were given directly from the term loan account with Punjab National Bank (PNB), indicating that interest-bearing funds were used for these advances. The assessee's claim that it had sufficient interest-free funds was contradicted by the facts on record. The AO's findings were based on independent evidence from the term loan account, which the assessee did not dispute.

Commercial Expediency of the Loans:
The assessee argued that the loans to sister concerns were for business purposes and relied on the Supreme Court's decision in S.A. Builders Ltd. vs. CIT(A), which allows interest deductions on borrowed funds if advanced for commercial expediency. However, the assessee failed to provide any factual basis or evidence to establish commercial expediency or business necessity for these loans. The CIT(A) upheld the AO's disallowance, noting that the assessee did not demonstrate how the loans advanced to sister concerns were for the preservation, protection, or advancement of its business.

Additions Based on Hypothetical Situations:
The assessee contended that the additions were based on hypothetical situations, surmises, conjectures, and personal presumptions without proper verification or consideration of material and details on record. However, the AO and CIT(A) found that the assessee did not provide sufficient evidence to support its claims, and the disallowance was based on concrete facts and legal principles.

Charging of Interest Under Section 234A:
The assessee also contested the AO's decision to charge interest under Section 234A of the Income Tax Act while computing the demand. However, this issue was not elaborated upon in the judgment, indicating that it was not a significant point of contention in the appeals.

Conclusion:
The Tribunal dismissed the appeals of the assessee for the assessment years 2012-13 and 2013-14, upholding the disallowance of interest on loans advanced to sister concerns. The Tribunal found no error or illegality in the CIT(A)'s order and concluded that the assessee failed to establish commercial expediency or business necessity for the interest-free loans. The decision was pronounced in virtual court proceedings on 13.10.2022 at Allahabad, U.P.

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