2016 (7) TMI 1557 - AT - Income Tax

Tribunal limits interest rate, disallows interest, emphasizes business purpose. Revenue's appeals dismissed due to tax threshold.

Assistant Commissioner of Income Tax, Circle-4, Jaipur Versus M/s Autolite (India) Ltd. and Vice-Versa.

The Tribunal upheld the CIT(A)'s decision to restrict the interest rate to 9% instead of 15% and partially disallow the interest paid by the assessee. The ... Interest on loan given to sister concern u/s 36(1) - CIT(A) restricting the rate of interest @ 9% from 15% applied by the A.O - whether the loans were given by the assessee as a measure of commercial expediency ? - Nexus between the interest bearing funds and advance made - HELD THAT:- As U/s 36, the interest paid in respect of capital borrowed for the purposes of business or profession is allowed to be deducted. As per Section 36(1)(iii) of the Act, a) there must be borrowing of capita by the assessee The assessee must have paid the interest in the the capital borrowed and c) The borrowed capital borrowed was by the assessee for the purposes of business or profession, then only the assessee is entitled to the deduction. From perusal of the balance sheet, it is clear that though there is increase in share capital but simultaneously, there is also increase in the loan and the fixed assets of the assessee company, therefore, in our view, the assessee was required to prove whether on the date of making investment or giving the interest free amount to the sister concern, the assessee was having sufficient interest free funds available with it. For that purposes, the assessee should demonstrate from its cash flow statement and bank account that it has date-wise availability of interest free funds on the date of making advances to the sister concern. In our view, the assessee has failed to prove on the date of making investment in M/s Autopal Industries Limited that it has interest free funds available with it. No material was produced before AO despite the remand order of the Tribunal to substantiate the availability of surplus fund . Whether some business connection or strategical investment was required to be made by the assessee by providing the interest free borrowed capital to M/s Autopal Industries Limited i.e. to prove the commercial expediency in lending the amount? - As relying on Hero Cycle Pvt. Ltd. Vs. CIT [2015 (11) TMI 1314 - SUPREME COURT] will come to the irresistible conclusion that the assessee has failed to prove the business connection with the amount given as loan and advances to the assessee. As per page 32 of the paper book, the loan has been utilized by the M/s Autopal Industries for repayment to Pennar Peterson Ltd. and government dues like PF/ESI/Excise/Electric bill, payment to employees and payment towards imported goods. In our view, none of the usages of advance by the M/s Autopal Industries proves business interest with that of the business of the assessee. In fact in the written submissions it is mentioned that “there was labour unrest in M/s Autopal Industries from 17.8.1996 during which the production was hampered therefore the assessee company had tried to help the said the M/s Autopal Industries “In our view submission of the assessee, that it tried to help M/s Autopal Industries on account of labour unrest was not supported by any document or record. Moreover the unrest in 1996 does not give any cause to advance the huge amount to M/s Autopal Industries 1999-2000 and 2000-2001. The records shows, contrary to the submissions, M/s Autopal Industries utilized the amount for other purposes (not for settlement of dues of labour except ₹ 19.46 lakh). It is expected from a prudent business man like the assessee in term of Hon’ble Supreme court judgment, to make use of the funds on the basis of commercial principle and should not waste good money against the bad money. No commercial expediency has been shown by the assessee for giving such a huge advances after taking advances from the financial institutions on paying the interest. In view thereof, the appeal of the assessee is required to be dismissed. Tribunal is duty bound to decide the issue as it thinks fit and appropriate in accordance with facts and circumstances of the case. In our view, what is provided U/s 36, the deduction on the amount of interest paid on the capital borrowed for the purposes for business or profession. The provision is made applicable on the “capital borrowed”and has not restricted to the “capital borrowed during the year”. If we agree to the proportion of the ld AR, then it will amount to rewriting the provisions of law. The Tribunal being a creation of statute is bound to adhere to the law laid down in the statute book and is not within its liberty to make the additions by way of judicial order in the statute book. If we accept the argument of the ld counsel for the assessee whereby if we held that the interest shall be disallowed on the capital borrowed during the assessment year then the entire thrust and purpose of the provision will disappear and make the provision redundant. In view thereof, the submission of the ld AR whereby he sought to restrict the disallowance only for the amount borrowed during the assessment year, is not acceptable. Even otherwise the tribunal is also governed by its earlier remand order, where on such submissions were referred or addressed. Hence, the appeal of the assessee is dismissed on this ground. AY - 2001-02 - Assessee company has failed to prove the nexus between the interest bearing funds and advance made by it to the M/s Autopal Industries. It has also failed to prove the business connection with the amount given as loan and advance. The facts narrated by assessee is general in nature. The assessee has not submitted any documentary evidence to prove the contention that the loan amount was given for the purpose of business, for which, it is clear from the facts above that the assessee made loan and advance for non business purposes. The ld CIT(A) has confirmed 9% interest charge instead of 15% applied by the ld Assessing Officer. From the above facts and circumstances, in our view, no new facts has been narrated by the ld DR before us, therefore, we uphold the order of the ld CIT(A) Issues Involved:1. Restriction of the rate of interest from 15% to 9% by CIT(A).2. Failure of the assessee to prove the business connection with loans and advances to sister concern.3. Non-acceptance of the assessee’s contention that no interest was chargeable on the opening balance of debit balance.4. Partial confirmation of disallowance made by the Assessing Officer out of interest paid.Detailed Analysis:1. Restriction of the Rate of Interest from 15% to 9% by CIT(A):The common ground in the revenue’s appeal was whether CIT(A) erred in restricting the rate of interest to 9% from 15% applied by the Assessing Officer (A.O.). The CIT(A) had decided in the earlier years to apply a 9% interest rate instead of 15%, and this decision was upheld in the current appeal. The Tribunal noted that the CIT(A)'s decision was based on the principle that the A.O. should charge interest at 9%, as was directed in previous years. The Tribunal found no new evidence or arguments to overturn this decision and upheld the CIT(A)'s order to apply a 9% interest rate.2. Failure of the Assessee to Prove the Business Connection with Loans and Advances to Sister Concern:The assessee argued that the loans given to M/s Autopal Industries Limited were for business purposes and commercial expediency. However, the A.O. and CIT(A) found that the assessee failed to provide sufficient documentary evidence to prove this claim. The Tribunal emphasized that under Section 36(1)(iii) of the Income Tax Act, the interest paid on borrowed capital is deductible only if the borrowing is for business purposes. The Tribunal noted that the assessee did not demonstrate a clear nexus between the interest-bearing funds and the advances made to the sister concern. Furthermore, the Tribunal referenced the Supreme Court's decision in S.A. Builders, which stated that commercial expediency must be proven for such deductions, and found that the assessee failed to meet this requirement.3. Non-acceptance of the Assessee’s Contention that No Interest was Chargeable on the Opening Balance of Debit Balance:The assessee contended that no interest should be charged on the opening balance of the debit balance with M/s Autopal Industries Limited. The Tribunal reviewed the decisions in prior years, where the A.O. had not made disallowances on the opening balances. The Tribunal found that the CIT(A) did not address this specific contention in the current appeal. However, the Tribunal upheld the A.O.'s decision to include the opening balance in the interest calculation, aligning with the principle that interest disallowance should consider the total outstanding amount, not just the advances made during the year.4. Partial Confirmation of Disallowance Made by the Assessing Officer out of Interest Paid:The CIT(A) had partially confirmed the disallowance made by the A.O. out of the interest paid by the assessee. The Tribunal reviewed the arguments and evidence presented, including the assessee's claim of having sufficient own funds to cover the advances. The Tribunal found that the assessee failed to provide adequate evidence to substantiate the availability of surplus funds at the time of making the advances. The Tribunal also considered the commercial expediency argument and found that the assessee did not demonstrate that the advances were made for business purposes. Consequently, the Tribunal upheld the partial disallowance of interest by the CIT(A).Revenue’s Appeals for A.Y. 2000-01 and 2001-02:For A.Y. 2000-01, the Tribunal dismissed the revenue's appeal based on the CBDT Circular No. 21 of 2015, which sets a threshold for tax effect in appeals. The tax effect in this case was below the limit, making the appeal non-maintainable.For A.Y. 2001-02, the Tribunal upheld the CIT(A)'s decision to charge interest at 9% instead of 15%, as the assessee failed to prove the business connection with the loans and advances. The Tribunal found no new evidence to overturn the CIT(A)'s decision and dismissed the revenue's appeal.Conclusion:The Tribunal dismissed both the assessee's and the revenue's appeals, upholding the CIT(A)'s decisions to restrict the interest rate to 9% and partially disallow the interest paid by the assessee. The Tribunal emphasized the need for the assessee to prove the business purpose and commercial expediency of the advances to the sister concern, which the assessee failed to do.