G.E.T Water Solutions Private Limited vs. Assistant Commissioner of Income Tax - (Income Tax Appellate Tribunal) (10 Feb 2022)

Once it is an established fact that, there is a commercial expediency, no interest can be disallowed under Section 36(1)(iii) of the IT Act

MANU/IX/0064/2022

Direct Taxation

The assessee is a company engaged in the business of setting up & service of Effluent Water Treatment Plants, filed return of income. During the course of assessment proceedings, the AO noticed that, the assessee company had paid interest on various loans and advances. It was further noticed that, the assessee company had also advanced loans and advances to groups/subsidiary companies, but not charged any interest on such loans. Therefore, the AO called upon the assessee to explain, as to why, interest paid on loans, cannot be disallowed under Section 36(1)(iii) of the Income Tax Act, 1961 (IT Act) for diversion of interest bearing funds for non-business purpose.

The AO, however, was not convinced with the explanation furnished by the assessee and according to him, the assessee has utilized borrowed funds for the purpose of loans and advances given to sister concern for non-business purpose and accordingly, opined that interest paid on loans to the extent of monies diverted for non-business purpose, cannot be allowed under Section 36(1)(iii) of the IT Act and thus, disallowed a sum of Rs.73,05,596 under Section 36(1)(iii) of the IT Act.

Being aggrieved by the Assessment Order, the assessee preferred an appeal before the learned CIT(A). The assessee argued that loans and advances given to groups/subsidiary companies in the course of normal business of the assessee, cannot be considered as diversion of funds for non-business purpose to disallow interest under Section 36(1)(iii) of the IT Act. The Learned CIT(A) rejected arguments of the assessee and upheld the findings of the AO towards addition made for disallowance of interest under Section 36(1)(iii) of the IT Act.

The solitary issue that needs to be resolved in the given facts and circumstances of the case is whether loans and advances given to groups/subsidiary companies is out of interest free funds or out of interest bearing funds, which warrants disallowance of proportionate interest under Section 36(1)(iii) of the IT Act.

It is a well-established principles of law that when there is a business expediency, then the assessee is at liberty to deal with its finance in accordance with its business requirements. The AO cannot sit in arms chair of the businessman to decide its business affairs and direct how to deploy its funds. As long as the assessee establishes the business connection or commercial expediency, then it is free to deal with its affairs in accordance with its requirements. Thus, the AO cannot disallow proportionate interest expenses under Section 36(1)(iii) of the IT Act merely for the reason that no interest has been charged on loans and advances given to groups/subsidiary companies.

In present case, the assessee had filed necessary evidences to prove that, there is a business connection between the assessee and the company to whom loans and advances were given. Therefore, once it is an established fact that there is a commercial expediency, no interest can be disallowed under Section 36(1)(iii) of the IT Act. The assessee has placed all evidences to prove that, interest free loans given to groups/subsidiary companies is out of interest free funds available with the assessee at the relevant point of time.

Therefore, interest disallowance made by the AO under Section 6(1)(iii) of the IT Act, is not correct. The Learned CIT(A) without appreciating the facts, simply confirmed the addition made by the AO towards disallowance of proportionate interest expenses under Section 36(1)(iii) of the IT Act. Hence, the order passed by the Learned CIT(A) is set aside and the AO is directed to delete the additions made towards interest under Section 36(1)(iii) of the Act. Appeal allowed.

Tags : ASSESSMENT ADDITIONS LEGALITY