2022 (12) TMI 219 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - assessee advanced interest free loan to director / relativeswhereas the assessee borrowed funds and debited interest at less amount - HELD THAT - No commercial expediency of advancing loan could be established by the assessee. Accordingly, Ld. AO computed proportionate interest disallowance u/s 36(1)(iii) for Rs.40.47 Lacs. The Ld. CIT(A) confirmed the same. Aggrieved, the assessee is in further appeal before us. The limited argument of Ld. AR is that own interest free funds far exceed the interest free advances granted by the assessee and therefore, it would be presumed that the loans were advanced out of own funds. Concurring with the same, we remit this matter back to the file of Ld. AO for fresh adjudication in the light of aforesaid argument. The assessee is directed to substantiate its claim. This ground stand allowed for statistical purposes. The appeal of the assessee for AY 2015-16 stands partly allowed. Addition made u/s 2(22)(e) - assessee received interest free advances entities who had common shareholders - HELD THAT - We find that the fact that the assessee is not a shareholder in the two entities, remain undisturbed before us and therefore, no such addition could have been made in the hands of the assessee as per the cited decision of Hon ble Supreme Court Madhur Housing Development Co 2017 (10) TMI 1279 - SUPREME COURT . Therefore, no fault could be found in the impugned order. The appeal stands dismissed.

Summary

Issues:
1. Disallowance of expenses relating to Bio-technology R & D.
2. Interest disallowance u/s 36(1)(iii).
3. Deletion of addition made u/s 2(22)(e).

Issue 1 - Disallowance of expenses relating to Bio-technology R & D:
The assessee appealed for AY 2014-15 & 2015-16 regarding disallowance of expenses related to Bio-technology R & D. The Tribunal noted delay in appeals due to the Covid-19 lockdown and condoned the delay. The issue was recurring and had been decided in favor of the assessee for AY 2013-14. The Tribunal examined the approval obtained by the assessee for in-house R&D activities and recognized that the expenses incurred were predominantly revenue in nature, thus allowable as business deductions under Sec. 37(1). The Tribunal also highlighted that the assessee had already commenced its business, and the disallowance made by the lower authorities was deemed unsustainable in law. Consequently, the disallowance was deleted for both years.

Issue 2 - Interest disallowance u/s 36(1)(iii):
In AY 2015-16, the assessee challenged the disallowance of interest under Sec. 36(1)(iii) related to interest-free loans advanced to directors/relatives. The AO disallowed a proportionate interest amount, which was upheld by the CIT(A). The Tribunal, however, directed a fresh adjudication by the AO, instructing the assessee to substantiate its claim that the loans were advanced from own interest-free funds. This ground was allowed for statistical purposes, and the appeal for AY 2015-16 was partly allowed.

Issue 3 - Deletion of addition made u/s 2(22)(e):
The revenue's appeal for AY 2014-15 focused on the deletion of addition under Sec. 2(22)(e) concerning interest-free advances received from certain entities. The AO treated the advances as deemed dividends, but the CIT(A) deleted the addition, citing the assessee's non-shareholder status in those entities. The Tribunal upheld the CIT(A)'s decision, emphasizing that no fault was found in the impugned order, leading to the dismissal of the revenue's appeal.

In conclusion, the Tribunal allowed the assessee's appeal for AY 2014-15, partly allowed the appeal for AY 2015-16, and dismissed the revenue's appeal for AY 2014-15. The order was pronounced on 18th November 2022.