2019 (12) TMI 408 - AT - Income Tax

Disallowance of interest on borrowings - account of diversion of funds to sister-concern - no tax deducted at source - only contention raised is that the advances were made to sister-concern out of commercial expediency and hence no disallowances can be made for the interest expenditure - HELD THAT - The financial constraints of the sister-concerns and damage to goodwill cannot be accepted as deciding factors of commercial expediency unless the assessee proves that failure of business of sister-concerns has an impact on the business / goodwill of the assessee. The assessee in this case has not been able to prove with necessary evidence that the failure of the business of the sister concern has an impact on the assessee. The assessee has not been able to prove that there is commercial expediency in diverting interest free funds to the sisterconcerns when assessee was paying huge interest on its borrowings - Therefore, the interest expenditure to the extent of funds diverted to sister concerns has been rightly disallowed by the A.O. Disallowance of interest by invoking the provisions of section 40(a)(ia) of the I.T.Act - HELD THAT - Admittedly, the loans were advanced by the Directors of the assessee-company. As per the assesseecompany s audited balance sheet, the loans in question are standing against the Directors (and not in the name of the banks). Once it is admitted that the loans are from Directors, the interest on such loans have to be paid to the Directors. Therefore, undoubtedly, tax ought to have been deducted at source on such interest payment by the assessee-company under the provisions of section 194A of the I.T.Act - In the instant case, since there is no deduction of tax at source u/s 194A of the I.T.Act, the Assessing Officer has correctly invoked the provisions of section 40(a)(ia) of the I.T.Act and disallowed interest payment. The appeal filed by the assessee is dismissed.

Summary

Issues:
1. Disallowance of interest paid amounting to ?20,90,000 on account of diversion of funds to sister-concern.
2. Disallowance of ?25,25,000 u/s 40(a)(ia) of the I.T.Act.

Issue 1: Disallowance of interest paid amounting to ?20,90,000 on account of diversion of funds to sister-concern:

The assessee, a company engaged in printing and publishing, filed an appeal against the CIT(A)'s order disallowing interest on borrowings under sections 36(1)(iii) and 40(a)(ia) of the I.T.Act. The Assessing Officer and CIT(A) disallowed the interest, stating that commercial expediency should benefit the assessee's business directly. The Tribunal noted that the failure of the sister concerns to pay bank dues did not impact the assessee's business, thus disallowing the interest. The Tribunal rejected the appeal, stating that the diversion of funds to sister concerns without proving commercial expediency did not warrant a deduction under section 36(1)(iii).

Issue 2: Disallowance of ?25,25,000 u/s 40(a)(ia) of the I.T.Act:

The Assessing Officer disallowed interest of ?25,25,000 under section 40(a)(ia) as the assessee failed to deduct tax at source on interest paid to directors who had loaned money to the company. The CIT(A) upheld the disallowance, stating that even if the interest was paid directly to the bank, the liability under TDS provisions remained. The Tribunal affirmed the disallowance, emphasizing that tax should have been deducted on interest payments to directors as per section 194A. As the assessee did not comply with TDS requirements, the disallowance under section 40(a)(ia) was deemed correct, and the appeal was dismissed.

In conclusion, the Tribunal upheld the disallowances of interest paid amounting to ?20,90,000 and ?25,25,000, respectively, due to diversion of funds to sister-concern without proving commercial expediency and failure to deduct tax at source on interest payments to directors. The appeal was dismissed on both issues.