2014 (2) TMI 473 - AT - Income Tax

Tribunal allows interest on advances to sister concerns, dismisses disallowance under Section 14A

The Tribunal allowed the assessee's appeals for both assessment years, overturning the disallowance of interest on advances made to sister concerns. The ... Interest free loans given to sister concern – Held that:- The amounts advanced by the assessee to CDPL was for the purpose of commercial expediency of the assessee only - the judgement in S.A. Builders v. CIT [2006 (12) TMI 82 - SUPREME COURT] - the interest-free loans were given to its sister concerns and others as a measure of commercial expediency - the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed - The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business - The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency – Decided in favour of Assessee. Issues Involved:1. Justification of CIT (A) in confirming the orders of the AO regarding advances made to sister concerns.2. Disallowance under Section 14A of the Income Tax Act for the assessment year 2010-11.Issue-wise Detailed Analysis:1. Justification of CIT (A) in Confirming the Orders of the AO Regarding Advances Made to Sister Concerns:The primary issue raised by the assessee for both assessment years (2009-10 and 2010-11) was whether the CIT (A) was justified in confirming the orders of the AO, which disallowed the interest on pro-rata basis on advances made to sister concerns. The assessee argued that these advances were made in the normal course of business and for business purposes.The assessee, a private limited company engaged in property development and construction, had declared significant incomes in its returns for the relevant years. During assessment proceedings, the AO noted substantial advances to sister concerns and disallowed the interest on these advances, amounting to Rs.10,92,61,900/- for AY 2009-10 and Rs.16,42,32,367/- for AY 2010-11, citing non-business purposes.Upon appeal, the CIT (A) upheld the AO's disallowance, referencing several judgments from the Hon'ble High Court of Kerala, which supported the non-business purpose stance. However, the assessee contended that these advances were for commercial expediency, citing various agreements and reductions in outstanding balances as evidence.The Tribunal carefully reviewed the agreements and found that the advances were indeed for commercial purposes, such as acquiring agricultural lands, office fittings, and construction projects. The Tribunal noted that the advances were well-documented and aligned with the business activities of the assessee. Additionally, the Tribunal referenced earlier favorable judgments in the assessee's own case, which supported the commercial expediency argument.The Tribunal concluded that the advances were for business purposes and commercial expediency, thus overturning the CIT (A)'s confirmation of the AO's disallowance. The interest disallowance for both assessment years was deemed unjustified.2. Disallowance under Section 14A of the Income Tax Act for the Assessment Year 2010-11:For the assessment year 2010-11, the assessee also raised an issue regarding the disallowance under Section 14A of the Income Tax Act. However, the CIT (A) had already decided this issue in favor of the assessee, deleting the disallowance made under Section 14A read with Rule 8D of the Rules.Given that the CIT (A) had ruled in favor of the assessee on this issue, the Tribunal dismissed this ground as not maintainable.Conclusion:The Tribunal allowed the assessee's appeals for both assessment years, overturning the disallowance of interest on advances made to sister concerns. The advances were deemed to be made for commercial expediency and business purposes, aligning with earlier favorable judgments in the assessee's own case. The disallowance under Section 14A for AY 2010-11 was also dismissed as it had already been decided in favor of the assessee by the CIT (A).Order Pronounced:The order was pronounced in the Open Court on 7th February, 2014.