2012 (8) TMI 947 - AT - Income Tax

Tribunal upholds disallowance of interest payments due to lack of commercial expediency.

The Dy. Commr. of Income-tax, Circle-III, Jalandhar Versus M/s. Bright Enterprises Pvt. Ltd. and M/s. Bright Enterprises Pvt Ltd. Versus The Asstt. Commr. of Income-tax, Circle-III, Jalandhar

The Tribunal allowed the Revenue's appeal and dismissed the assessee's appeal. The Tribunal reinstated the Assessing Officer's order, disallowing the ... Disallowance of interest paid to banks whereas the assessee had advanced interest free loan to its sister concerns with whom it had no business dealings - Held that:- No where the assessee has established the measure of commercial expediency either before the AO or before the ld. CIT(A) and not even before us. There is nothing on record that the money so advanced by the assessee to the sister concern had been used as a measure of commercial expediency. In the facts and circumstances of the case, the ld. CIT(A) has wrongly interpreted and relied upon the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (2006 (12) TMI 82 - SUPREME COURT) which in fact goes against the assessee. In the facts and circumstances, the order of the Ld. CIT(A) is reversed and that of the A.O. is restored. Thus, all the grounds of the Revenue are allowed. Issues:Cross-appeals by the assessee and the revenue regarding the deletion of an addition made by the Assessing Officer on account of disallowance of interest paid to banks by the assessee who had advanced interest-free loans to its sister concerns.Analysis:1. Revenue's Grounds of Appeal:The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 1,31,24,332 made by the AO due to the disallowance of interest paid to banks as the assessee had given interest-free loans to its sister concerns without any business dealings. The AO highlighted that the huge advance to the sister concern impacted the ability to repay bank loans, leading to interest payments. The Revenue relied on a High Court decision. However, the CIT(A) referred to the Supreme Court's judgment in S.A. Builders Ltd., emphasizing commercial expediency in such transactions. The CIT(A) found that the funds advanced to the sister concern were used for its business, thus allowing the relief to the assessee.2. Assessee's Grounds of Appeal:The assessee challenged the CIT(A)'s decision to sustain an addition of Rs. 33,00,000 on fees paid to specific entities, emphasizing that the disallowance was not justified based on factual and legal grounds. The CIT(A) also failed to consider the losses of earlier years and made incorrect observations regarding disallowances. However, the Tribunal dismissed most of the grounds as not pressed by the assessee and upheld the CIT(A)'s decision on the losses of earlier years due to lack of evidence supporting their allowance under the law.3. Judgment and Conclusion:The Tribunal, after hearing the contentions, reversed the CIT(A)'s decision on the Revenue's appeal, reinstating the AO's order. The Tribunal found that the measure of commercial expediency in advancing funds to the sister concern was not established by the assessee, leading to the disallowance of interest payments. On the assessee's appeal, the Tribunal dismissed most grounds not pressed by the assessee and upheld the CIT(A)'s decision on the losses of earlier years due to the absence of supporting evidence. Consequently, the appeal of the Revenue was allowed, and the appeal of the assessee was dismissed.