2022 (11) TMI 663 - AT - Income Tax

Disallowance of interest made or borrowed funds which have been utilized for giving interest free loans to related parties - HELD THAT - The onus is on the assessee to show that this deal was for commercial expediency purposes and the said sum was part of the stock in trade for the land so purchased. Even after being provided various opportunities by the lower authorities, the assessee failed to provide any details for the reason for such interest free advances. For the amount paid to M/s. Sigma Steel Engineers Pvt. Ltd and M/s. Horizon Hitech Engicon Limited, the assessee has merely mentioned that outstanding amounts for work executed. We fail to understand that if it was an outstanding against the work executed then, it should be a part of the current liability which the assessee has to pay and in case it is not an outstanding and given as an interest free advance for a work contract then, where are such work contract agreements. Neither before the ld. Assessing Officer nor before the ld. CIT(A), the assessee has been able to furnish any such details. Even before us also, general submissions have been made that the amounts have been utilized for commercial expediency purposes. It is for the assessee to prove that it is a part of commercial expediency and such interest free advance are given for the purpose of business and profession and if the assessee fails to satisfy then, the assessee cannot escape from such disallowance of interest expenditure which are in the instant case where the assessee has borrowed funds, paid interest thereon claimed it as an expenditure and used the interest bearing funds for making interest free advances. We, therefore, fail to find any infirmity in the finding of the ld. CIT(A) and the same is confirmed. Appeal of the assessee is dismissed.

Summary

Issues:
Challenge to disallowance of interest on borrowed funds used for interest-free loans to related parties.

Analysis:
The appeal was against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2012-13, where the Assessing Officer disallowed interest on borrowed funds used for interest-free loans to related parties. The assessee contended that the interest-free loans were given for commercial expediency as part of its construction business. The Supreme Court has previously held that interest deduction can be claimed for interest-free loans if commercially expedient. The Assessing Officer disallowed the interest expenditure based on the utilization of borrowed funds for interest-free advances to related parties. The Commissioner upheld this decision, emphasizing the lack of proof of commercial expediency for the interest-free advances.

The Tribunal found that the assessee failed to establish the commercial expediency of the interest-free advances to related parties. Specific details regarding the purpose of the advances were lacking. For instance, regarding the loan to acquire land, it was not shown if it was for the company's project or investment. Similarly, for advances to other parties, no evidence of work contracts or commercial necessity was provided. The Tribunal noted that without proof of commercial expediency, the disallowance of interest expenditure was justified. The Tribunal upheld the Commissioner's decision, dismissing the appeal.

In conclusion, the Tribunal affirmed the disallowance of interest on borrowed funds used for interest-free loans to related parties due to the lack of proof of commercial expediency. The assessee's failure to demonstrate the purpose of the advances led to the dismissal of the appeal.