2023 (3) TMI 323 - HC - Income Tax

Addition for not charging of interest on loans and advances given to Directors and Subsidiaries - whether ITAT was right in law in applying the ratio of this Hon'ble Court in the case of CIT Vs. Abhishek Industries 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT when no diversion of interest bearing funds had been made to Shri A.S.Bhatia? - HELD THAT - Interest liability of the assessee towards the bank on the borrowing which was taken by the assessee had no bearing because the assessee had sufficient funds of its own which the assessee could have advanced and it was for the AO to establish a nexus between the borrowing and advancing to prove that expenditure was for non-business purposes. With respect to the loan given to the Directors, the assessee had claimed deduction of interest which was allowed by the Hon'ble Supreme Court. With this observation, the Hon'ble Supreme Court allowed the appeal and the judgment of the High Court in Commissioner of Income Tax-I, Ludhiana vs. M/s. Abhishek Industries Limited, Ludhiana 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT was over-ruled. As regards amount given to the sister concern, the issue in the present case does not need to be examined as even in the present case, the issue with respect to money given to the sister concern-Punjab Biotechnology Plant Ltd. has already attained finality in Hero Cycles 's case 2015 (11) TMI 1314 - SUPREME COURT With respect to loan given to Shri A.S. Bhatia, the issue has been considered by the Hon'ble Supreme Court in Hero Cycles 's case 2015 (11) TMI 1314 - SUPREME COURT as loan of Rs.34 lacs was given to the Directors when the credit balance was Rs.15 crores and this amount did not effect the business transaction carried out by the company after taking loan from the bank. The question of liability has already been answered in favour of the assessee by the Supreme Court in Hero Cycles's case (supra) wherein the judgment passed in Abhishek Industries (supra) has been overrurled. The judgment of Hero Cycles's case (supra) has, thereafter, been followed by this Court in Principal Commission of Income Tax vs. Holy Faith International (P) Ltd, 2017 (8) TMI 185 - PUNJAB AND HARYANA HIGH COURT decided benefit of interest was allowed under Section 36(1)(iii) - Decided in favour of assessee.

Summary

Issues involved:
- Disallowance of interest on loans and advances given to directors and subsidiaries without charging interest.
- Appeal against the order of the Income Tax Appellate Tribunal for the assessment year 2006-07.
- Dispute over diversion of funds by the assessee and disallowance of a specific amount.
- Interpretation of business expediency in relation to loans given to related parties.
- Application of legal precedents regarding interest disallowance under Section 36(1)(iii) of the Income Tax Act.

Issue 1: Disallowance of interest on loans and advances given to directors and subsidiaries without charging interest.
The appellant challenged the order of the Income Tax Appellate Tribunal (Tribunal) regarding the disallowance of Rs.13,61,450/- for not charging interest on loans and advances given to directors, relatives, and sister concerns. The Tribunal found that certain loans were interest-free and treated them as diversion of funds without business expediency, leading to disallowance. The Tribunal differentiated between loans given to related parties based on commercial rationale and those lacking such justification. The Tribunal's decision was based on the judgment in CIT Vs. Abhishek Industries Ltd., emphasizing the necessity of a nexus between borrowing and advancing funds for business purposes.

Issue 2: Appeal against the order of the Income Tax Appellate Tribunal for the assessment year 2006-07.
The appeal was filed by the assessee against the Tribunal's order dated 13.05.2011, concerning the assessment year 2006-07. The Tribunal's decision to disallow interest on certain loans and advances was a central point of contention in the appeal. The appellant sought to challenge the Tribunal's findings by invoking legal precedents and arguing for the application of business expediency principles in determining the allowability of interest expenses.

Issue 3: Dispute over diversion of funds by the assessee and disallowance of a specific amount.
The dispute revolved around the assessee's provision of interest-free loans and advances to directors, relatives, and sister concerns, which the Assessing Officer (AO) considered as a diversion of funds. The AO disallowed a specific amount, prompting the appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) subsequently deleted the disallowances after considering the source of funds and the nature of transactions, leading to a further appeal by the revenue to the Tribunal.

Issue 4: Interpretation of business expediency in relation to loans given to related parties.
The Tribunal analyzed the loans given to related parties, such as directors and subsidiaries, to determine the presence of business expediency. It differentiated between loans made for personal benefit, lacking commercial rationale, and those made for joint collaborations or business development. The Tribunal's decision hinged on whether the loans were in line with business objectives and whether interest disallowance was justified based on the business purpose of the transactions.

Issue 5: Application of legal precedents regarding interest disallowance under Section 36(1)(iii) of the Income Tax Act.
The appeal referenced legal precedents, including the judgment in Hero Cycles (P) Ltd. Vs. Commissioner of Income Tax (Central), Ludhiana, and the subsequent Supreme Court ruling. These precedents highlighted the importance of establishing a connection between borrowed funds and their utilization for business purposes to determine the allowability of interest expenses. The appellant relied on these judgments to argue for the deduction of interest on loans given to directors and related parties based on the availability of surplus funds and business justifications.

This detailed analysis of the judgment highlights the key issues, legal interpretations, and precedents considered in the dispute over the disallowance of interest on loans and advances, providing a comprehensive overview of the case's legal complexities and outcomes.