2023 (4) TMI 386 - AT - Income Tax

Addition of interest on loan - assessee has failed to substantiate the alleged interest expenses as business expenses where the identity business activities and genuineness of transactions of loan creditor were not established - CIT-A deleted the addition - HELD THAT - As documents furnished like landline telephone bill letters served on the assessee from four different prominent banks including a speed post lends credence to the assertion that lender company existed on the given address more particularly when the lender company has been assessed by the Department and the assessment order also containing the same address. It is also observed from the assessment order of the lender company that against the nature of business it is noted as trading in securities and iron ores which also demonstrates that assessee and the lender company are in the similar line of trade. ROC master record data also demonstrates the active status of the lender company. On the allegation that assessee did not produce the directors of the lender company we note that neither Ld. AO nor Ld. CIT(A) made any concerted effort by issuing summons u/s 131 for enforcing the personal attendance of the directors of the lender company. Even in the remand proceedings AO did not choose to issue summons under section 131 of the Act even though Ld. CIT(A) had given specific instruction in this respect. As per CIT(A) that the alleged advance free loan was nothing but advance to trade creditors which was an essential business requirement in expediency to maintain the level of inventory which the assessee was maintaining. He observed that loan taken by the assessee was essential for the business of the assessee and the corresponding interest expense was for business expediency hence allowable expenditure. There is no material on record adduced by the Revenue which could rebut the documents produced by the assessee. The finding of fact arrived at based on documentary evidence on record cannot be said to be perverse. Nothing has been pointed out that any of the findings arrived at by the CIT(A) is on the basis of misleading of evidence or failure to examine any material documents while coming to such conclusions. Decided against revenue.

Summary

Issues involved:
The appeal concerns the deletion of an addition of Rs. 3,18,14,902/- on account of interest on a loan, with the main issue being the failure to substantiate the interest expenses as business expenses due to lack of establishment of the identity, business activities, and genuineness of the loan creditor.

Summary of Judgment:

Issue 1 - Lack of Substantiation of Interest Expenses:
The assessee, engaged in manufacturing sponge iron, filed its income tax return reporting nil income after setting off brought forward loss. The assessing officer noted interest payment of Rs. 3,18,14,902/- on unsecured loans. Despite furnishing details of the loans, including the name and address of the parties, the assessee failed to establish the identity and business activities of the lender company. The AO disallowed the interest expenditure as bogus, alleging the loan transaction was to avoid tax liability. The CIT(A) considered the total revenue receipts and inventory of the assessee, concluding that the borrowed funds were used for business activities, thereby deleting the disallowance.

Issue 2 - Submissions Before CIT(A) and Tribunal:
The assessee submitted further documents before the CIT(A), including loan confirmations, financial statements, and assessment orders of the lender company. The counsel argued that the lender company had been independently assessed by the department for the same assessment year, and the interest expenditure claimed was duly accepted in its assessment. The genuineness of the transaction was supported by TDS details, confirmation letters, and evidence of the lender company's existence at the given address.

Issue 3 - Judicial Analysis and Decision:
The tribunal noted the acceptance of the loan quantum in assessments of both the assessee and the lender company, along with documents supporting the lender company's existence and business activities. It observed the lender company's active status and similarity in trade with the assessee. The failure to produce the lender company's directors was attributed to the department's inaction in issuing summons. The CIT(A)'s finding that the interest expense was for business expediency was upheld, dismissing the revenue's appeal as lacking material to rebut the assessee's evidence.

The tribunal's decision on the interest expenditure claimed by the assessee was upheld, and the revenue's appeal was dismissed on 31st March, 2023.