2014 (5) TMI 393 - AT - Income Tax

Disallowance of interest expenses Held that - CIT(A) was rightly of the view that the assessee is charging more % of interest on the advances given than what he is paying on the loans taken there was no reason as to how the AO has calculated and why the addition has been made when the facts are just opposite as has been observed by the AO - the addition made by the AO does not have any basis and is factually wrong appreciation of the facts - the assessee company has own money in form of share capital, reserve & surplus and profit earned during the year - The interest charged from the sister concern as per the prevailing market rate - they have also assessed to tax (in same tax bracket) and there is no loss of revenue - The CBDT has issued circular on this issue, wherein it has been decided by the Board that no addition should be made where the sister concerns fall in the same tax bracket revenue has not controverted the findings of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Disallowance of interest expenses by the Revenue.

Analysis:
The appeal before the Appellate Tribunal ITAT Ahmedabad stemmed from the order of CIT(A)-VIII, Ahmedabad, concerning the assessment year 2006-07. The main issue revolved around the disallowance of Rs.71,43,000/- on account of interest expenses by the Revenue. The Assessing Officer (A.O.) noted that the assessee had borrowed a substantial amount but charged lower interest to related parties compared to the interest incurred on the borrowed funds. Consequently, the A.O. added Rs.71,43,000/- to the assessee's income.

Upon challenging the A.O.'s decision, the assessee presented the same arguments before the CIT(A), who carefully reviewed the case. The CIT(A) observed that the appellant had actually charged a higher percentage of interest on advances given than the interest paid on loans taken. The CIT(A) found the A.O.'s reasoning factually incorrect and baseless, ultimately directing the A.O. to delete the addition of Rs.71,43,000/- to the assessee's income. The CIT(A) ruled in favor of the appellant, highlighting the disparity in interest rates charged and paid by the company.

The Revenue, dissatisfied with the CIT(A)'s decision, brought the matter before the Appellate Tribunal. The Tribunal considered the arguments from both sides and examined the financial standing of the assessee. It was noted that the company had its own funds in the form of share capital, reserves, and profits, and the interest charged from sister concerns was in line with prevailing market rates. Additionally, the sister concerns were taxed in the same bracket, aligning with a circular issued by the CBDT. As the Senior D.R. did not challenge the CIT(A)'s findings, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal.

In conclusion, the Appellate Tribunal affirmed the decision of the CIT(A) to dismiss the Revenue's appeal regarding the disallowance of interest expenses, emphasizing the legitimate charging of interest rates and the absence of revenue loss due to the transactions with sister concerns.