2015 (9) TMI 896 - AT - Income Tax

Advances made to the sister concern - Disallowance of interest regarding non charging of interest on the loans advanced to sister concern - Held that - As far as business expediency is concerned, we find that the assessee has not proved as to how its business was benefited directly or indirectly by advancing interest free loans to sister concerns and other related parties.In our opinion,the onus of proving justification was on the assessee and it did not discharge the same.Saving the reputation of sister concern cannot be termed business expendiency. We are of the opinion that every business entity has unrestricted right to manage its own affairs in the manner it deems fit. But, it cannot claim expenditure that are not incurred wholly and exclusively for carrying out its business of profession. If the assessee had not made a claim of interest expenditure in the P &L account on the borrowings that were advanced as interest free loans to the related persons and WCPL,there would not have been any problem. State should not be made party to those items of expenditure that are unrelated with business of an assessee.In the case before us,the assessee has done the same thing.It wants to shift the burden of its generosity in form of claiming an untenable claim.In our opinion there was no commercial expediency in the transactions entered in to by the assessee i.e. non charging of interest from WCPL,PBIPL and others was necessitated by any business consideration. The assessee had failed to establish existence of commercial expediency. The FAA has given a categorical finding of fact that there was no direct nexus between the borrowings of the funds and diversion thereof for non-business purposes. He had dealt with each and every of the four parties to whom loans were advanced and had given a categorical finding of fact that the transactions in question were not guided by commercial expediency.In our opinion,his order does not suffer from any legal or factual infirmity as far as first direction of the Tribunal in concerned. Considering the second direction of the Tribunal availability of funds has been discussed by the FAA. In our opinion,availability of funds from partners account has be seen in light of the principle laid down by the Hon ble Apex Court in the case of Reliance Utility (supra). For the limited purpose of calculation,we are remitting back the matter to the file of the AO. He would consider the argument taken by the assessee before us about availability of funds in partners account before making proportionate disallowance,in any. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest regarding non-charging of interest on loans advanced to sister concerns.
2. Commercial expediency and availability of interest-free surplus funds.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Regarding Non-charging of Interest on Loans Advanced to Sister Concerns:
The assessee challenged the disallowance of Rs. 86,80,195 by the CIT(A) for not charging interest on loans advanced to sister concerns, arguing that the recovery of these loans was doubtful. The assessee contended that the CIT(A) failed to consider the explanation provided, which highlighted that the principal amount was recoverable but not the interest.

The Assessing Officer (AO) had initially found that the assessee debited Rs. 86,83,951 under the head 'Interest' in the P&L account but failed to prove the nexus between the loans and interest-free funds. The AO computed the interest chargeable at 12% and disallowed the interest expenditure accordingly. The Tribunal, in its earlier order, remanded the issue to the AO for fresh consideration, directing the AO to verify the commercial expediency and availability of interest-free funds.

Upon reassessment, the AO concluded that there was no business expediency in advancing loans to the sister concerns and that the assessee had not provided sufficient details to establish that the loans were given out of interest-free surplus funds. The AO also disallowed interest on the loan advanced to an ex-partner, citing the partnership deed's provision for charging interest on debit balances.

2. Commercial Expediency and Availability of Interest-free Surplus Funds:
The assessee argued before the FAA that the loans were advanced to save the reputation and goodwill of the partners, who were also directors or partners in the sister concerns. The FAA, however, upheld the AO's disallowance, stating that the assessee failed to prove how advancing interest-free loans benefited its business. The FAA emphasized that the reasons provided by the assessee, such as the sister concerns' financial difficulties and partner disputes, did not establish commercial expediency.

The Tribunal reiterated the principles governing the deduction of interest expenditure under Section 36(1)(iii) of the Act, emphasizing the need for the assessee to prove that the loans were used for business purposes. It noted that business expediency requires a transaction to be done for commercial purposes, resulting in profit or preventing loss for the assessee. The Tribunal highlighted that advancing loans to save the reputation of sister concerns does not constitute business expediency and that the assessee failed to establish a direct or indirect benefit to its business.

The Tribunal concluded that the assessee did not discharge the onus of proving commercial expediency and that the FAA's findings were factually and legally sound. However, for the limited purpose of calculating the availability of funds from partners' accounts, the Tribunal remitted the matter back to the AO.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal remanding the matter to the AO for recalculating the availability of funds in partners' accounts. The Tribunal upheld the disallowance of interest expenditure due to the lack of commercial expediency and failure to establish the availability of interest-free surplus funds.