2017 (1) TMI 724 - AT - Income Tax

Advances as Business Transactions: Interest Disallowance Rejected (2)

Income Tax Officer – 18 (2) (3), Mumbai Versus M/s. T.M. Enterprises

The Tribunal dismissed the Revenue's appeals, affirming that advances to M/s Menghraj Sons were business transactions, not interest-free loans. The ... Disallowance of interest on account of interest fee advances - Held that:- Documents of transactions with Menghraj Sons and outstanding debtors details of Menghraj Sons were all filed by the assessee before the AO/CIT(A) as per certificate furnished by the assessee along with paper book filed with the tribunal. We donot find any perversity in the order of learned CIT(A) which we affirm and sustain. No incriminating material has been brought on record by the Revenue to disprove or demolish findings recorded in learned CIT(A) order. The outstanding amount is receivable from M/s Menghraj & Sons on account of normal business transactions between the two entities, although payments were received belatedly. In our considered view, no disallowance of interest towards proportionate interest paid by the assessee on borrowings made by it can be made u/s 40A(2) of the Act as was made by the AO and we order deletion of the said addition by confirming/sustaining the order of learned CIT(A) . - Decided in favour of assessee Issues Involved:1. Disallowance of interest on account of interest-free advances given to M/s Menghraj Sons.2. Establishing whether the advances to M/s Menghraj Sons were business transactions or interest-free loans.3. Applicability of Section 40A(2) of the Income-tax Act, 1961.Issue 1: Disallowance of Interest on Interest-Free AdvancesThe Revenue contended that the assessee had diverted interest-bearing borrowed funds to its sister concern, M/s Menghraj Sons, without obtaining any additional benefit. The Assessing Officer (AO) disallowed Rs. 60,78,950/- for AY 2010-11 and Rs. 48,63,183/- for AY 2011-12, treating these as expenses covered under Section 40A of the Income-tax Act, 1961. The AO observed that the assessee paid interest to various parties but did not charge interest on advances given to M/s Menghraj Sons, a related party.Issue 2: Nature of Advances to M/s Menghraj SonsThe assessee argued that M/s Menghraj Sons was appointed as a consignment agent in 2004, and the outstanding amount was due to sales transactions conducted through them. The consignment agency agreement was terminated on 1st May 2009, with an outstanding amount of Rs. 4,74,89,808/- as of that date. The assessee submitted that the outstanding balance represented business transactions and not interest-free advances. The CIT(A) accepted this argument, noting that the transactions were business-related and that the AO failed to establish a direct nexus between borrowed funds and the advances.Issue 3: Applicability of Section 40A(2)The CIT(A) held that the AO did not provide evidence that the advances were made out of borrowed funds. The outstanding amounts were due to sales transactions, and the assessee had business connections with M/s Menghraj Sons. Therefore, the disallowance under Section 40A(2) was not justified. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's transactions with M/s Menghraj Sons were business-related and not interest-free advances.ConclusionThe Tribunal dismissed the Revenue's appeals for both assessment years, affirming that the advances to M/s Menghraj Sons were business transactions and not interest-free loans. The disallowance of interest was not warranted, as the AO failed to establish a direct link between borrowed funds and the advances. The Tribunal sustained the CIT(A)'s order, concluding that no disallowance under Section 40A(2) was applicable.