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TMI Blog2022 (6) TMI 559X X X X Extracts X X X X X X X X Extracts X X X X ..... hted average rate of interest considering the variability of interest rate range from @8.75% to 16% though this approach cannot be incorporated in the audited financial statements but the reasonableness and explanations to provide the loans to sister concerns cannot be over looked and the group transfers between one sister concern to another sister concern as per requirement of funds. The Ld.AR submissions are realistic and duly supported by the material information and is appreciated. Accordingly, we do not find merits in the findings of the CIT(A) and we rely on the judicial decisions and commercial expediency explained by the Ld.AR that the assessee s business activities as a going concern and the construction projects are in progress. Any delay in project construction activities due to financial crunch will increase the overheads of the projects. Accordingly, we set aside the order of CIT(A) on this disputed issue and direct the Assessing officer to delete the addition and allow the grounds of appeal of the assessee. - I.T.A No.5021/Mum/2019 And I.T.A No.5022/Mum/2019 - - - Dated:- 23-5-2022 - Shri M Balaganesh (Accountant Member) And Shri Pavan Kumar Gadale (Judicial Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee has obtained loan from M/s Suryakrupa Farms Pvt Ltd @16%pa and directly advanced to Lodha Developers @15.45% interest rate. The assessing officer in the assessment proceedings has called for the details and show cause for differential and proportionate interest disallowance u/s 36(1)(iii) of the Act. Whereas the assessee has submitted the details of interest charged at the average rate of cost of funds obtained from various related concerns. The AO found that the differential rate of interest is 0.55% being a difference of (16% - 15.45%.). The assessee explained that the funds have been provided to the sister concerns for business purpose and there is a direct nexus of funds. But the A.O. was not satisfied with the explanations and worked out the differential interest of Rs.14,65,098/- and was disallowed u/s 36(1)(iii) of the Act. 6. On the second issue, the A.O. has made addition of excess depreciation claim of Rs.12,59,835/- and the addition of interest on late payment of TDS. Finally the AO has assessed the total loss of Rs.1,01,95,320/- and passed the order u/s 143(3) r.w.s. 92CA(3) of the Act dated 29/11/2016. Aggrieved by the order, the assessee has filed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of the Act, Facts of the case: 1.1 During the year under consideration the Appellant had taken loans from associate companies and extended loans to other associate companies. The weighted average cost of borrowing as worked out by the appellant was 15.42%. During the year under considered the appellant had taken a loan from M/s.Suryakrupa Farms and Constructions Pvt Ltd @ 16%. Also the company had advanced loan to M/s.Lodha developers Pvt Ltd @ 15.45%. 1.2 The Assessing Officer has held that there is a direct nexus between loan taken from M/s Suryakrupa Farms and Constructions Pvt Ltd @ 16% and loan advanced to M/s Lodha developers Pvt Ltd @ 15,45%, thereby disallowing an amount of interest expense of Rs.14,65,098/- under section 36(l)(iii) of the Act without taking into consideration that the weighted average cost of borrowing for the appellant is 15.42% and that for the purpose of disallowance under section 36(l)(iii) weighted average cost of borrowing is to be considered. Section 36(1)(iii) is a code in itself: 1.3 As stated in the statement of Facts and Grounds of Appeal, Appellant claimed deduction of the said interest expense of Rs.14,65,098/- stri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies at a much lower rate(i.e. ranging from 8.75% to 15.45%). Nevertheless, the interest has been charged by the assessee company at the weighted average borrowing rate, without going into the specific borrowing rate of each and every loan. The Appellant company would like to submit that the advances has been taken from W/s, Suryakrupa Farms and Constructions Pvt Ltd for procurement of land for purpose of business and there is no nexus between amounts received from M/s. Suryakrupa Farms and Constructions Pvt Ltd and advanced to M/s. Lodha Developers Pvt Ltd. A summary of advance received from M/s. Suryakrupa Farms and Constructions Pvt Ltdand loan given to Lodha Developers Pvt Ltd. is enclosed as Annexure 2. This clearly shows that there is no nexus between advance received for procurement of land from M/s Suryakrupa.-Farms and Constructions Pvt Ltd and loan given to Lodha Developers Pvt Ltd. 1.7 This connection, reliance is placed on the decision of the Honourable Supreme Court in the case of Hero Cycles (P) Ltd vs Commissioner of Income-tax (Central) Ludhiana [(2015) 63 taxmann.com 308(SC)], wherein the apex court upheld the primary right of any businessman/ organization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, for not charging interest or charging interest at a low rate. Dispute between the- Revenue and the assessee often arises when money is borrowed with interest and loan is advanced interest-free or at a low rate of interest. In such 3 case the tendency of the AO generally is to disallow the interest paid on the money borrowed either in full or proportionately depending upon the quantum of loan advanced and interest, if any, charged. But whether the assessee charged interest on loan advanced or not is not at a!! a relevant consideration for determining aliowability of interest paid under section 36(l)(iii) of the Act As already explained, the relevant consideration is whether the moneys have been borrowed for the purposes of business or profession and whether interest paid. In the interest of maintain good business relation, interest-free loans or loans at a low rate of interest may be given to others with whom the assessee has business relation or with whom he expects to establish business connection or with whom he has other business obligations, present or past. There may be many other reasons also, both business or non-business. If Interest-free loan or loan at a low rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- (1) Hero Cycles (P) Ltd vs CIT (2015) 63 taxmann.com 308 (SC) the proposition that Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital (Interest free loans) - Assessment year 1988-89 - Whether once it is established that there is nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case - Held, yes -Assessee filed its return claiming deduction of interest paid on borrowed sums from Bank under section 36(1)(iii) - Assessing Officer finding that assessee had used borrowed funds for giving interest free loans to its subsidiary company and directors, rejected assessee's claim - High Court upheld order of Assessing Officer - It was noted that advance to subsidiary company became imperative as a business expediency in view of undertaking given to financial institutions by assessee to effect that it would provide additional margin to subsidiary company to meet working capital for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred revenue expenditure in books of account to be written off over a period of five years - Assessing Officer thus allowed only 1/5th of payment as deduction - Whether since assessee made actual payment, and course of action adopted by assessee was in consonance with provisions of Act, merely because a different treatment was given in books of account could not be a factor which would deprive assessee from claiming entire expenditure as a deduction - Held, yes [Para 19] [In favour of assessee] (4) Sumangala Developers Farms Pvt Ltd vs the ACIT ITA No.182/Mum/2016 7. We find from the facts that the AO has not disputed the genuineness of payment of interest receipt, interest on the loan borrowed and amount advanced. The only issue raised by the lower authorities is that the assessee has not taken these advances for business purposes. We find that once the AO has allowed part of interest for particular year, the genuineness is established. Secondly, even the purpose is also established. For this, the assessee has produced the resolution passed by Board of Directors of assessee company dated 26.092.2010, which clearly states that these loans secured or unsecured are for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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