2015 (10) TMI 462 - AT - Income Tax

Tribunal upholds disallowance of interest on advances to family members without commercial purpose

Sh. Kewal Chaudhary, Versus Asstt. Commr. of Income Tax, C/o M/s. Action Batteries, Range-II, Jalandhar

The Tribunal upheld the order of the CIT(A) confirming the disallowance of Rs. 3,43,673/- on interest allegedly chargeable on interest-free advances given ... Disallowance of interest allegedly chargeable on interest free advances given to family members - Held that:- Commercial expediency has been explained to be the business interest of the assessee advancing interest free loans as opposed to the interest of the person receiving the loan. Hence, merely because the assessee has got sufficient interest-free funds in its books will not prevent disallowance of the interest expenditure if the assessee has advanced money free of interest without any commercial expediency attached to such advance. Considering the fact that there is no evidence or even a claim that any commercial expediency was involved in giving the interest free advances to Mrs. Sunita Chaudhary and Mr. Samir Choudhary,the disallowance of interest expenditure was accordingly rightly upheld. - Decided against assessee. Issues Involved:1. Legality and factual correctness of the order by the authorities below.2. Confirmation of addition of Rs. 3,43,673/- on account of interest allegedly chargeable on interest-free advances given to family members.Detailed Analysis:1. Legality and Factual Correctness of the Order by the Authorities Below:The appellant challenged the legality and factual correctness of the order passed by the CIT(A), Jalandhar, dated 25.04.2012, for the assessment year 2007-08. The primary contention was that the order was against the law and facts of the case. The Tribunal reviewed the submissions and found that the Assessing Officer (AO) had discussed the issue of disallowance of interest under section 36(i)(iii) of the Income Tax Act with the assessee's representative. The AO had relied on the decision of the Punjab & Haryana High Court in the case of M/s. Abhishek Industries Ltd., which upheld such disallowances. The Tribunal noted that the assessee had provided a working of the interest disallowable, which indicated acceptance of the disallowance. Therefore, the Tribunal found no infirmity in the CIT(A)'s order, which confirmed the AO's action.2. Confirmation of Addition of Rs. 3,43,673/- on Account of Interest Allegedly Chargeable on Interest-Free Advances:The AO disallowed Rs. 3,43,673/- being 12% of Rs. 28,63,942/- advanced interest-free to family members, citing that these advances were not for trade purposes and the assessee was paying interest on loans taken by the firm. The Tribunal examined whether the advances were for the purpose of the assessee's business, referring to the decision in S.A. Builders Ltd. vs. CIT(Appeals), which established that the test for allowing interest as a deduction was whether the advance was made as a measure of commercial expediency. The Tribunal also considered similar cases, such as CIT vs. Marudhar Chemicals and Pharmaceuticals (P) Ltd., where disallowance was upheld due to lack of commercial expediency.The Tribunal noted that the assessee failed to establish any commercial expediency or business purpose for the interest-free advances to Mrs. Sunita Chaudhary and Mr. Samir Choudhary. The Tribunal emphasized that merely having sufficient interest-free funds does not prevent disallowance if the funds were advanced without any commercial expediency. Consequently, the Tribunal upheld the disallowance of Rs. 3,43,673/-.Conclusion:The Tribunal found no infirmity in the order of the CIT(A) and dismissed all grounds of appeal raised by the assessee. The appeal was dismissed, and the disallowance of Rs. 3,43,673/- was upheld. The judgment emphasized the necessity of demonstrating commercial expediency for interest-free advances to justify the allowance of interest expenditure under section 36(i)(iii).