2023 (7) TMI 567 - HC - Income Tax

Interest paid to the bank - disallowance made as funds/loan received from the bank had been diverted as interest-free advances to the partners - disallowance was mandated as assessee had not been able to demonstrate commercial expediency - does the respondent/assessee need to demonstrate commercial expediency in each year concerning a loan transaction which took place in and about AY 2005-06? - HELD THAT - If the loan availed on account of stated commercial expediency, which has, in a sense, received the imprimatur of the appellant/revenue when the loan was first taken and several years thereafter, surely, the respondent/assessee is not required, once again, to demonstrate commercial expediency in each year. The AO seems to have disregarded this aspect in the AY in issue. Whether revenue incur any loss of revenue whether interest is allowed in the hands of the respondent/assessee i.e., the partnership firm or its partner? - The revenue cannot but accept that the interest expenditure is revenue neutral. In case this was to be disallowed in the hands of respondent/assessee i.e., the partnership firm, it would have to be allowed in the hands of the partners.

Summary

Issues Involved:
- Condonation of delay in filing and re-filing the appeal
- Disallowance of interest expenses by the Assessing Officer
- Appeal concerning Assessment Year (AY) 2015-16
- Consideration of commercial expediency in interest disallowance
- Revenue neutrality of interest expenditure

Condonation of Delay:
The appellant/revenue filed applications seeking condonation of delay of 23 days in filing and 90 days in re-filing the appeal. The delay was condoned based on the reasons provided in the applications.

Disallowance of Interest Expenses:
The issue before the statutory authorities was whether interest paid to the bank by the respondent/assessee could be disallowed due to diverting funds as interest-free advances to partners. The Assessing Officer disallowed interest expenses, citing lack of "commercial expediency." The disallowed amount was Rs. 5,16,16,215/- in proportion to non-interest bearing advances to partners. The Commissioner of Income Tax (Appeals) reversed the AO's view, which was upheld by the Tribunal. The appellant/revenue argued that commercial expediency needed to be demonstrated, but the court found that the loan availed earlier did not require repeated demonstration of commercial expediency.

Consideration of Commercial Expediency:
The court noted that interest paid by the respondent/assessee to the bank was allowed as deductible expenditure in previous years. The question arose whether the respondent needed to demonstrate commercial expediency each year for a loan transaction from AY 2005-06. The court found that the respondent was not required to demonstrate commercial expediency repeatedly. The court also highlighted that disallowing interest expenditure would be revenue neutral as it would need to be allowed in the hands of the partners.

Conclusion:
The court declined to interfere with the Tribunal's decision, stating that the interest expenditure was revenue neutral and the respondent was not required to demonstrate commercial expediency repeatedly. Therefore, the appeal was closed.