2024 (12) TMI 496 - AT - Income Tax

Disallowance of interest expenditure - Business expediency of giving interest-free advances to farmers - HELD THAT - Assessee has duly explained the business expediency for giving interest free advances to potato growers ie to tie up with the farmers so that the farmers keep their potato crop/produce in the cold storage of the assessee, and the assessee can earn rent from potatoes kept by the farmers in the cold storage of the assessee. Revenue cannot sit in the arm chair of businessman and then decide how the business is to be run. Rather, it is the businessman who has to arrange their business affairs keeping in view the business expediencies in order to maximise their revenues and profits.See case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT In the instant case, the business expediency in granting interest free advances out of interest bearing funds was not accepted by authorities below. The addition as was made by the authorities below is not sustainable as I accept the contention of the assessee that granting of interest free advances to potato growers in order to tie the farmers for keeping their crop with the cold storage of the assessee, so that the assessee can earn rent from the potatoes kept by the farmers in the cold storage of the assessee, is out of business expediency as stated by the assessee. The assessee has furnished list of 549 persons who have kept 169054 packets of potatoes with the assessee, wherein rent of Rs. 77,76,480/- was earned by the assessee, and duly offered to tax. No defect is pointed out by any of the authorities. Accordingly, the addition made by the Assessing Officer is directed to be deleted. The assessee succeeds in its appeal.

Summary

Issues Involved:

1. Legality of the order passed by the National Faceless Appeals Centre (NFAC), Delhi.
2. Disallowance of interest expenditure by the Assessing Officer.
3. Business expediency of giving interest-free advances to farmers.
4. Procedural aspects of the assessment and appellate proceedings.

Issue-wise Detailed Analysis:

1. Legality of the Order Passed by NFAC, Delhi:

The assessee challenged the legality and arbitrariness of the order passed by the NFAC, Delhi. The Tribunal reviewed the procedural aspects of the case and the transition to the faceless regime. It was noted that the assessee did not make further submissions after the transition, which contributed to the procedural concerns raised. However, the Tribunal focused on the substantive issues rather than procedural defects, thereby addressing the core grievances of the assessee.

2. Disallowance of Interest Expenditure:

The core issue was the disallowance of interest expenditure amounting to Rs. 10,33,374/-. The Assessing Officer disallowed this expenditure on the grounds that the assessee had given interest-free advances to potato growers while incurring interest on borrowed funds. The Tribunal scrutinized the rationale behind the disallowance and found that the authorities below did not adequately consider the business context and the explanations provided by the assessee.

3. Business Expediency of Giving Interest-Free Advances:

The assessee argued that the interest-free advances to farmers were made out of business expediency, to ensure that farmers store their potatoes in the assessee's cold storage, thereby generating rental income. The Tribunal acknowledged this business strategy and emphasized that revenue authorities should not interfere with business decisions made in good faith to maximize profits. The Tribunal referenced the Supreme Court judgment in S.A. Builders, which supports the principle that business expediency justifies certain financial decisions. Consequently, the Tribunal found the disallowance of interest expenditure unsustainable and accepted the assessee's explanation of business expediency.

4. Procedural Aspects of the Assessment and Appellate Proceedings:

The Tribunal examined the procedural conduct of the Assessing Officer and the CIT(A). It was observed that the Assessing Officer did not utilize available powers to summon farmers for verification, despite the assessee's request. The CIT(A) also failed to conduct further inquiries. The Tribunal criticized this lack of thorough investigation, emphasizing the duty of tax authorities to ensure accurate assessments. The Tribunal's decision underscored the importance of procedural diligence in tax assessments and appeals.

Conclusion:

The Tribunal allowed the appeal, directing the deletion of the disallowed interest expenditure. It highlighted the importance of recognizing business expediency and criticized the procedural lapses in the assessment and appellate processes. The judgment reinforced the principle that tax authorities should not second-guess legitimate business decisions and must conduct thorough investigations to ascertain the true nature of transactions.