2021 (8) TMI 116 - AT - Income Tax

Disallowance of proportionate interest u/s.36(1)(iii) - assessee has borrowed term loan from HDFC bank during F.Y.2010-11 relevant to A.Y.2011-12 and has advanced loan / intercorporate deposit (ICD) to M/s. Jogindra Exports Ltd., and M/s. Anchor Leasing Pvt. Ltd during the same year - HELD THAT - Once the borrowed funds were indeed utilized by the assessee company for the purpose of its business, the interest paid on such borrowings becomes an allowable deduction u/s.36(i)(iii) of the Act. Merely because the shareholder of the assessee company is also a shareholder of holding company of M/s. Jogindra Exports Ltd., the same would not make any difference for the recovery of the dues by the assessee company. This is one of the main allegation leveled by the Revenue on the assessee for non-recovery of dues from M/s. Jogindra Exports Ltd., and for disallowance of interest paid on loans in the hands of the assessee company on a proportionate basis. We find that the assessee had duly explained this fact before the ld. CIT(A) by stating that list of Directors extracted by the ld. AO to ascertain the key executives of M/s. Hindustan Appliances Ltd., which is holding company of M/s. Jogindra Exports Ltd., is for F.Y.2015-16 which is much later to the year under appeal. The decision of not charging interest from M/s. Jogindra Exports Ltd., during the year under consideration was made on account of commercial expediency and to protect atleast the principal portion of the dues by understanding the financial sickness of the borrower company. In any case, there is absolutely no provision in the statute to allow interest payment on loans only to the extent of interest income earned by the assessee and disallow the remaining interest portion thereon, as is case before us in the impugned appeal. Facts stated by the assessee company with regard to borrower company becoming sick were not disputed by the Revenue before us. As stated earlier, once it is held that borrowings are used for the purpose of business, interest paid on such borrowing becomes an allowable deduction u/s.36(1)(iii) - we hold that the ld. CIT(A) was not justified in confirming the disallowance of interest - Decided in favour of assessee.

Summary

Issues:
Challenge to disallowance of proportionate interest u/s.36(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Proportionate Interest u/s.36(1)(iii)

The assessee, a domestic company engaged in financing, challenged the disallowance of proportionate interest u/s.36(1)(iii) of the Act. The company had borrowed funds from HDFC bank and advanced loans to other companies in its ordinary course of business. The interest income received and paid by the assessee was a key point of contention. The Revenue sought to disallow the interest deficit of one borrower, which was not received due to financial difficulties faced by the borrower. The assessee provided detailed explanations and evidence to support its stance, including documents showing the borrower's financial crisis and the decision not to charge interest. The Tribunal noted that the interest income from the borrower had been accepted as business income in previous years and held that the interest paid on borrowings for business purposes is allowable as a deduction u/s.36(1)(iii) of the Act. The Tribunal emphasized that the borrower's financial situation justified the decision not to charge interest, citing commercial expediency. The Tribunal referenced a Supreme Court case to support its decision, highlighting that the loans were obtained for business purposes, justifying the deduction of interest paid. Ultimately, the Tribunal directed the Assessing Officer to allow the interest as a deduction u/s.36(1)(iii) of the Act, thereby partially allowing the assessee's appeal.

In conclusion, the Tribunal's decision in this case centered on the disallowance of proportionate interest u/s.36(1)(iii) of the Act, emphasizing the business purpose of the loans and the commercial expediency behind the decision not to charge interest in specific circumstances. The Tribunal's analysis relied on legal precedents and detailed explanations provided by the assessee to support its decision to allow the interest as a deduction.