2025 (2) TMI 1033 - AT - Income Tax

Disallowance of finance charges made u/s 36(1)(iii) - as per AO interest bearing funds have been diverted to non-business purpose - HELD THAT - Basic business of the assessee is real estate development and in that process the assessee collected advances from customers for sale of flats. As per the agreement with the customers the assessee has paid interest in case of delay in delivery of flats. The assessee had also proved that the funds received from the customers in the form of advances have been utilized for the purpose of business of the assessee. In fact it is not a case of the AO that the assessee had diverted funds for non-business purposes. Assuming for a moment that loans and advances given to group concerns are diversion of interest-bearing funds the fact remains that as the AO himself noted the group companies of the assessee are also engaged in the business of real estate development and there is a business nexus between the appellant and the group concerns and thus in our considered opinion loans and advances given to other group companies can be said to be in the normal course of the business of the assessee and thus there is a commercial expediency. AO erred in disallowing finance charges being interest paid on customers advances without any valid reasons. CIT(A) without appreciating the relevant facts simply sustained the addition made by the AO. Assessee appeal allowed.

Summary

The appeals ITA Nos.1218 & 1219/Hyd/2024 were filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre for the assessment years 2016-17 and 2017-2018. The main issue in this case was the disallowance of finance charges of Rs. 51,28,612/- under Section 36(1)(iii) of the Income Tax Act, 1961.The Assessing Officer determined that interest paid for non-business activity @ 12% out of diverted interest bearing funds amounted to Rs. 51,28,612/-. The assessee argued that the interest paid on customer advances was wholly and exclusively for the purpose of the business and should be allowed as a deduction. The Assessing Officer and the Commissioner of Income Tax (Appeals) upheld the disallowance based on lack of supporting documents and failure to prove the utilization of advances for business purposes.The Tribunal considered that the assessee, engaged in real estate development, collected advances from customers for sale of flats and commercial spaces. The MOU with customers included provisions for interest payments ranging from 10% to 14% in case of delays in delivery. The Tribunal found that the funds received from customers were indeed utilized for business purposes, and there was a commercial expediency in the loans and advances given to group concerns.The Tribunal concluded that the Assessing Officer erred in disallowing finance charges without valid reasons and that the Commissioner of Income Tax (Appeals) failed to appreciate the relevant facts. As a result, the Tribunal directed the Assessing Officer to delete the additions made towards disallowance of finance charges for the relevant assessment years.In summary, the Tribunal allowed the appeals filed by the assessee, directing the deletion of the disallowance of finance charges for both assessment years 2016-17 and 2017-2018. The decision was based on the finding that the funds received from customers were utilized for the business of real estate development, and there was a commercial expediency in the loans and advances given to group concerns.