2016 (6) TMI 168 - AT - Income Tax

Disallowance of interest expenses - Held that - Methodology of computing interest expenditure allowable under the Act at the rate of 7% of average outstanding balance on the opening and closing balance outstanding to be payable to GTL Ltd by the assessee company and disallowing the balance interest payable by the assessee company to GTL Limited as per contractual obligations itself is fallacious as no finding of fact is arrived at by the AO that the funds so received by the assessee company from time to time as advance from GTL Limited on which interest is payable as per contractual obligations has been diverted for non-business purposes or are utilized for any other purposes other than business purposes. The assessee company has on the other hand brought on record evidences that own funds/interest free funds to the tune of ₹ 25.41 crores are available with it which is reflected in the audited balance sheet, that the assessee company has deployed inter-corporate deposit to the tune of ₹ 25.79 crores on which interest income of ₹ 1.28 crores has been earned which is duly offered for taxation in the return of income filed by the assessee company with the Revenue and the assessee company has advanced interest free funds to the tune of ₹ 14.22 crores to the suppliers and the ledger extracts and audited balance sheets to this effect are duly placed in the paper book. The advances to the suppliers of ₹ 14.22 crores have been stated by the assessee company to be made for purposes of business keeping in view the commercial expediency and it is not brought on record by the Revenue that these interest free advances to suppliers are not made for the business purposes except making a bald statement that the interest is not incurred for the purposes of business and the interest is excessive. In any case , the assessee company has demonstrated that there are sufficient interest free funds available with the assessee company of ₹ 25.41 crores as per audited Balance Sheet filed in the paper book which is sufficient enough to cover the interest free advances to suppliers to the tune of ₹ 14.22 crores and presumption shall apply unless rebutted that the interest free funds available with the assessee company are utilized for advancing interest free advances to suppliers - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest expenses of ?22,23,298/-.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses of ?22,23,298/-:

The primary issue in this case revolves around the disallowance of interest expenses amounting to ?22,23,298/- by the Assessing Officer (AO) and subsequently confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee company, engaged in the business of trading computer hardware and software, had appealed against this disallowance.

Facts and Submissions:
The assessee company paid interest at 7% on advances received from its principal client, GTL Limited. The AO observed that the interest was paid even for a single day and disallowed the excess interest of ?22,23,298/- as excessive and not incurred for business purposes. The assessee company argued that the advances were received to mitigate the risk of obsolescence and were fully utilized for business activities. The company also pointed out that it earned interest income from inter-corporate deposits, which neutralized the interest outgoings.

CIT(A)'s Findings:
The CIT(A) upheld the AO's disallowance, stating that the assessee company failed to prove that the interest-bearing funds were utilized for business purposes. The CIT(A) emphasized that the expenditure must be incurred wholly and exclusively for business purposes as per Section 37 of the Income Tax Act, 1961. The CIT(A) found no real connection between the expenditure and the business object, deeming the connection remote and illusory.

Arguments Before the Tribunal:
The assessee company contended before the Tribunal that the interest was paid as per contractual obligations with GTL Limited. The company provided detailed computations and TDS certificates to substantiate the interest payments. The assessee also highlighted that in subsequent assessment years (2009-10, 2010-11, and 2011-12), no disallowance was made by the Revenue on similar interest payments, advocating for consistency in tax treatment.

Tribunal's Analysis:
The Tribunal noted that the AO's methodology of computing allowable interest expenditure based on average outstanding balances was flawed. The AO did not establish that the funds received were diverted for non-business purposes. The assessee company demonstrated that it had sufficient interest-free funds (?25.41 crores) and earned substantial interest income from inter-corporate deposits (?1.28 crores). The Tribunal applied the presumption that interest-free funds were used for advancing interest-free advances to suppliers, citing the Bombay High Court's decision in Reliance Utilities and Power Limited.

Conclusion:
The Tribunal concluded that no addition or disallowance of interest expenditure of ?22,23,298/- was warranted. The appeal filed by the assessee company was allowed, and the disallowance made by the AO and confirmed by the CIT(A) was deleted.

Result:
The appeal filed by the assessee company for the assessment year 2008-09 was allowed, and the disallowance of ?22,23,298/- towards interest expenditure was ordered to be deleted.