2023 (2) TMI 692 - AT - Income Tax

Addition u/s 36(1)(iii) - disallowance of interest - loans and advances to sister concern - appellant company advanced certain sums to its concern, Darode Jog and Associates during the earlier previous years - HELD THAT - Admittedly, no fresh advance was made during the previous year relevant to the assessment year under consideration. The appellant company had borrowed the funds from ASK Investment Managers Pvt. Ltd. i.e. third party in the form of allotment of debentures at 10%. The interest on borrowed funds had been claimed as deduction while computing the income of the assessee company. The assessee company had asserted before the Assessing Officer and the ld. CIT(A) that the advance was made by the assessee company to its sister concern, namely, Darode Jog and Associates for the business purposes i.e. procurement of lands in terms of agreement entered into by it with ASK Investment Managers Pvt. Ltd.. It is also an admitted fact that the said Darode Jog and Associates had not procured any land. Thus, the purpose of advance of loan only for business purpose is established beyond the doubt. In the present case, the assessee company had discharged the onus of proving the expenditure incurred for the purpose of business purpose. It is different matter that the beneficiary of loans i.e. Darode Jog and Associates had not utilized the funds for the business purpose. Therefore, the ratio of the decision of the Hon ble Supreme Court in the case of S.A. Builders Ltd. ( 2006 (12) TMI 82 - SUPREME COURT is squarely applicable to the facts of the present case. Admittedly during the previous year relevant to the assessment year under consideration, the appellant firm had not advanced any loan to the Darode Jog and Associates and it is also an admitted fact that in the earlier years in which the loans were made, no disallowance of interest was made. Therefore, the ratio of CIT vs. Sridev Enterprises 1991 (1) TMI 52 - KARNATAKA HIGH COURT and CIT vs. Givo Limited 2010 (7) TMI 151 - DELHI HIGH COURT wherein, it was held that for the purpose of disallowance of interest u/s 36(1)(iii) in case where the disallowance was not made in the earlier years, the opening balance of loans and advances to sister concern should not be considered for the purpose of disallowance of interest. Thus, in the light of the above discussion, we are of the considered opinion that no disallowance of interest is warranted in the facts of the present. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 36(1)(iii) of the Income Tax Act, 1961.
2. Addition of interest paid to directors on unsecured loans under section 40A(2)(b) of the Act.

Issue 1: Disallowance under section 36(1)(iii) of the Income Tax Act, 1961:

The appellant company had advanced funds to its sister concern for business purposes, but the Assessing Officer disallowed a sum under section 36(1)(iii) of the Act, alleging diversion of interest-bearing funds for non-business purposes. The appellant contended that the loans were for business purposes, citing the decision in S.A. Builders Ltd. vs. CIT. The CIT(A) upheld the disallowance, stating the purpose of the loan was not for business. The appellant argued that no fresh advance was made in the relevant year and relied on past assessments for consistency. The Tribunal found that the loans were indeed for business purposes, following the Supreme Court's ruling and considering the lack of fresh advances in the relevant year, thereby allowing the appeal.

Issue 2: Addition of interest paid to directors on unsecured loans under section 40A(2)(b) of the Act:

The Assessing Officer made an addition for interest paid to directors on unsecured loans under section 40A(2)(b), deeming it unreasonable and excessive. The appellant challenged this addition, arguing that the interest was paid for a valid purpose. However, during the hearing, this ground was not pressed and was dismissed. Therefore, no further analysis or decision was provided on this issue in the judgment.

In summary, the ITAT Pune considered the disallowance under section 36(1)(iii) of the Income Tax Act, 1961, and ruled in favor of the appellant, finding that the loans were indeed for business purposes. The Tribunal highlighted the importance of the purpose of expenditure and past practices in similar cases. The judgment did not delve into the second issue regarding the addition of interest paid to directors on unsecured loans under section 40A(2)(b) as it was not pressed during the hearing.