2022 (11) TMI 1297 - AT - Income Tax

Addition of interest expenditure u/s 36(1)(iii) - lending business - non-charging interest or interest free loans given - AO held that the interest expenses incurred on loans obtained cannot be treated as business expenditure u/s 57 and the same cannot be allowable out of the income derived from partnership firm as there is no nexus between additions, in income and expenditures as no loans have been invested into a partnership firm as capital as stated by the assessee - HELD THAT - CIT(A) has taken charging interest at 4.36% as compared to the interest charged at 6% on loans to friends and families but the assessee before us has demonstrated that rate of interest earned at 6% per annum for the time period of loans and advances is for particular set up of loans and advances. Similarly borrowed loan at 6% was also there in the relevant A.Y. There was 0% return of income on borrowing of unsecured loan and the same was detailed before the AO as well as CIT(A). There was not a single case of non-charging interest or interest free loans while giving the loans by the assessee. Therefore, AO as well as the CIT(A) has made the addition on presumptive and assumptive percentage of charging of interest. The expenditure incurred was wholly and exclusively for the purpose of business of land trading and the same was also explained by the assessee in respect of lands sold reflected in the opening stock and land which was not sold at the closing stock and various unsecured loans borrowed were utilised during the course of normal business of land trading and financial business. Thus, AO and the CIT(A) was not right in disallowing the interest and has not taken proper cognisance of the provisions of Section 36(1)(iii) - Decided in favour of assessee.

Summary

Issues:
- Disallowance of interest expenditure under Section 36(1)(iii)
- Disallowance of interest received on refund under Section 244A
- Interpretation of provisions of Section 36(1)(iii)
- Consideration of submissions and evidence by CIT(A)

Analysis:
1. Disallowance of Interest Expenditure under Section 36(1)(iii): The assessee claimed deduction of interest expenses as business expenses, but the Assessing Officer disallowed it, stating that the interest expenses on loans obtained cannot be treated as business expenditure under Section 57 of the Income Tax Act. The Assessing Officer made a disallowance of Rs.26,58,136 towards interest expenses and also added Rs.2,057 related to interest received on refund under Section 244A. The CIT(A) partly allowed the appeal, and the AR argued that all borrowings and loans were utilized for the purpose of business. The AR demonstrated that interest was earned on loans given at 6% per annum, and there was no instance of non-charging interest. The Assessing Officer and CIT(A) were criticized for not considering the business purpose of the loans and advances, leading to the allowance of ground nos. 1 & 2.

2. Interpretation of Provisions of Section 36(1)(iii): The AR contended that the Assessing Officer wrongly calculated interest at 4.36%, whereas the actual rate was 6% per annum for loans given and borrowed. It was argued that all loans were utilized for business purposes, and the Assessing Officer's conclusions were deemed imaginary and without proper consideration of facts. The AR highlighted that the business assets exceeded the interest-bearing borrowed funds, indicating the genuine business nature of the transactions. The Tribunal found that the Assessing Officer and CIT(A) did not apply Section 36(1)(iii) correctly, leading to the allowance of the appeal.

3. Consideration of Submissions and Evidence by CIT(A): The AR presented detailed arguments regarding the utilization of loans for business activities, interest rates, and the mismatch between the Assessing Officer's calculations and the actual business operations. The Tribunal noted that the CIT(A) had not properly considered the submissions and evidence provided by the assessee, leading to an unjust disallowance of interest expenditure. Ground nos. 3 & 4 were allowed without prejudice, emphasizing the importance of considering all evidence before making a decision.

In conclusion, the Tribunal allowed the appeal of the assessee, highlighting discrepancies in the Assessing Officer's calculations, misinterpretation of provisions, and lack of proper consideration of evidence by the CIT(A). The judgment emphasized the necessity of a thorough analysis of business transactions and expenses in line with the relevant sections of the Income Tax Act.