2023 (4) TMI 888 - AT - Income Tax

Excessive interest expenses - interest paid @ 21% to one person is excessive - commercial expediency which necessitated taking of loan by the assessee @ 21% - interest income at the prevailing rate of 6 to 12% (maximum at rate of 15%) - AO restricting the amount of interest expenses to 15% as against 21% interest paid by the assessee - assessee submitted that the AO cannot sit in judgement as to the amount of interest which is required to be paid by the assessee, since given the commercial expediency of the facts of the instant case, it is assessee who is in the best position to decide at what rate of interest the loan may be required to be taken - HELD THAT - Since if the assessee is unable to establish the nexus between interest bearing loans and earning of interest income itself, the entire interest expense is liable to be disallowed and not part thereof as upheld by CIT(Appeals). Even in the assessment order, AO has not challenged the fact that assessee has not been able to establish the nexus between interest taken @ 21% and the earning of interest income by the assessee. Both the AO and CIT(Appeals) have not been able to controvert the commercial expediency demonstrated by the assessee for incurring a higher rate of 21% interest on loan taken from Shri Dharmesh Kumar Patel, given the facts of the instant case. Therefore, assessee has been able to establish both the commercial expediency for taking the interest at higher rate of 21% (since the same was required by the assessee on urgent basis to be given to the firm in which the assessee was a Director) and has also been able to establish the nexus as required under section 57 of the Act. As decided in CIT v. Darashaw Co. (P.) Ltd. 2014 (5) TMI 940 - BOMBAY HIGH COURT held that It cannot be said that interest expenditure on borrowed capital shall be debited, only if any income is made or earned. In the case of CIT v. Rajendra Prasad Moody 1978 (10) TMI 133 - SUPREME COURT held that to bring a case within section 57(iii), it is not necessary that any income should in fact have been earned as a result of expenditure. Therefore, interest paid on money borrowed for investment in shares, which had not yielded any dividend, was admissible under section 57(iii) of the Act. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Legality of the addition of Rs. 6,00,000/- by AO disallowing part of the interest claim.
2. Consideration of commercial expediency in borrowing funds.
3. Nexus between interest paid and interest income earned.

Summary:

1. Legality of the Addition of Rs. 6,00,000/-:
The assessee contested the order passed u/s 250 by CIT(A) upholding the addition of Rs. 6,00,000/- made by AO. The AO disallowed part of the interest claim, arguing that the interest paid at 21% to one person was excessive compared to the interest rates in other cases. The AO restricted the interest payment to 15%, resulting in an addition of Rs. 6,00,000/- to the assessee's income. The CIT(A) upheld this addition, stating that the assessee failed to demonstrate the nexus between the high-interest rate and the prevailing market rates.

2. Consideration of Commercial Expediency:
The assessee argued that the high-interest rate of 21% was due to commercial expediency, as the loan was taken urgently to make a payment to Ahmedabad Municipal Corporation. The assessee emphasized that the loan was unsecured, justifying the higher interest rate. The AO and CIT(A) did not consider the commercial expediency, which necessitated the loan at a higher interest rate. The tribunal observed that the assessee had established the commercial expediency for taking the loan at a higher interest rate of 21%.

3. Nexus Between Interest Paid and Interest Income Earned:
The tribunal noted that if the assessee failed to establish the nexus between interest-bearing loans and earning interest income, the entire interest expense would be disallowed, not just part of it. The tribunal found that both the AO and CIT(A) did not challenge the nexus between the interest paid at 21% and the interest income earned. The tribunal concluded that the assessee had established both the commercial expediency and the required nexus under section 57 of the Act.

Conclusion:
The tribunal allowed the appeal of the assessee, stating that the assessee had successfully demonstrated the commercial expediency and the nexus between the interest paid and the interest income earned. The tribunal referred to similar cases, supporting the assessee's contention that expenditure incurred out of commercial expediency is allowable under section 57(iii) of the Income Tax Act. The appeal was allowed, and the addition of Rs. 6,00,000/- was set aside.