2023 (8) TMI 1503 - AT - Income Tax

Disallowing interest u/s. 36(1) (iii) - difference of interest paid and received by the Appellant on trade advances received and inter-corporate deposit given to unrelated parties - scope of expression 'commercial expediency' - HELD THAT - Where the assessee borrows money carrying interest cost and lends the same to sister concern without interest, the interest paid/payable on borrowing cannot be disallowed, if the lending is on the grounds of commercial expediency When a holding company advances money to its subsidiary company which incurs losses, such advance is meant to protect its deep interest in the subsidiary, hence, the interest on amount borrowed is eligible for deduction, though it was advanced interest-free to the subsidiary company. The expression 'commercial expediency' was explained in plethora of cases by various judicial forums including Hon ble Apex Court. The expression 'commercial expediency' is an expression of wide import and it would include such expenditure a prudent businessman would incur for the purpose of business. It may not be a legal obligation but it is allowable if it is incurred on grounds of commercial expediency. Here in this case assessee is not able to make out a case of commercial expediency and also genuineness of the transaction entered into by the assessee. As decided in CR. AULUCK AND SONS P. LTD. 2014 (2) TMI 73 - PUNJAB AND HARYANA HIGH COURT assessee borrowed money and gave the same to sister concern which was incurring huge losses and its borrowing was declared as non-performing asset by the bank. The assessee was guarantor to the subsidiary company along with two other guarantors, being the group concerns. The interest-free loan was viewed by the Assessing Officer as a measure to reduce its income by claiming interest on borrowing @ 12% per annum and the sister concern to have the income there from. The tribunal held that there was no commercial expediency in giving interest-free loan to the allied concern and the interest attributable to interest-free advances was not allowable under section 36(1)(iii). - Decided against assessee.

Summary

Issues:
Disallowance of interest under section 36(1)(iii) for difference in interest rates received and paid by the assessee.

Analysis:
1. The appeal was against the order of the Ld. CIT (A) confirming the addition of Rs. 1,58,18,053 to the income of the appellant due to the disallowance of interest under section 36(1)(iii) for the difference in interest rates received and paid. The appellant argued that the differential rate was due to a breach of contract and not related to interest received on inter-corporate deposits.

2. The AO observed that the assessee received interest at 11.50% and paid interest at 13.50% per annum, resulting in a disallowed amount of Rs. 1,58,18,053. The Ld. CIT (A) upheld the AO's decision. The assessee, engaged in the export of white sugar, filed the return of income for A.Y. 2014-15, which led to scrutiny by the AO.

3. During the assessment, it was found that the assessee received a substantial advance from a customer in the past, which was settled years later through journal entries involving related parties. The transactions raised concerns about the purpose and transparency of the dealings, especially regarding the retention of funds with related companies for extended periods without clear business justifications.

4. The tribunal noted that the genuineness of the transactions and the commercial expediency behind them were crucial. The assessee's failure to demonstrate the genuine purpose of the transactions and their alignment with the business's objectives was a significant point of contention. The tribunal emphasized the need for transactions to serve the business's interests genuinely.

5. Referring to section 36(1)(iii) of the Income-tax Act, the tribunal highlighted the importance of interest paid in respect of capital borrowed for business purposes being allowed as a deduction. The tribunal cited legal precedents emphasizing that transactions must be genuinely aligned with business purposes and not used as a colorable device for other objectives.

6. Citing a relevant case, the tribunal discussed the concept of commercial expediency in lending money interest-free to related parties. The absence of commercial expediency and genuineness in transactions could lead to disallowances under section 36(1)(iii). The tribunal found similarities between the cited case and the present matter, reinforcing the importance of commercial justifications in transactions.

7. Considering the facts and legal principles, the tribunal dismissed the grounds raised by the assessee and upheld the Ld. CIT (A)'s order. The tribunal concluded that the assessee failed to establish commercial expediency and genuineness in the transactions, leading to the dismissal of the appeal.

8. Ultimately, the tribunal confirmed the Ld. CIT (A)'s order, dismissing the appeal of the assessee. The decision was based on the lack of demonstrated commercial expediency and genuineness in the transactions, aligning with legal principles and precedents.

This comprehensive analysis covers the issues raised in the judgment, providing a detailed breakdown of the tribunal's reasoning and decision.