2018 (4) TMI 177 - AT - Income Tax

Tribunal disallows interest expenses, adds notional income for assessment years 2009-10 & 2010-11. Lack of business justification cited.

Nalwa Investment Ltd. Versus Income-tax Officer, Ward 13 (1), New Delhi

The Tribunal upheld the disallowance of interest expenses and addition of notional interest income for assessment years 2009-10 and 2010-11. The ... Disallow the interest u/s. 36(1)(iii) read with section 40A - assessee had advanced money at lower rate of interest or free of interest out of the funds borrowed by the assessee at higher rate of interest - Held that:- The assessee was required to explain firstly that the money was advanced by the assessee to its sister concerns or its subsidiary companies either at lower rate of interest or free of interest; that if it is so, how and for what purpose the money advanced by the assessee were utilized by the borrowers; and that what were the business expediencies under which the assessee had advanced the money at lower rate of interest or free of interest. In the present case, as already stated, the aforesaid conditions do not stand established cumulatively to dislodge the disallowance made by the authorities below. The other decisions relied on by the assessee are also found distinguishable on facts. No justification to interfere with the order of the ld. CIT(A) finding no infirmity therein, which has been reached after following the ratio laid down in various decisions mentioned in the impugned order. Accordingly, the appeal of the assessee deserves to fail being devoid of merits. Issues Involved:1. Disallowance of interest expenses under Section 40A.2. Addition of notional interest income on interest-free advances.Detailed Analysis:1. Disallowance of Interest Expenses under Section 40A:The assessee contested the disallowance of Rs. 27,82,986/- out of interest expenses, arguing that the lower authorities erred by confirming the disallowance on the grounds that Section 40A was applicable. The Assessing Officer (AO) observed that the assessee paid interest between 9% to 11.5% on borrowings but received only 7% on lending. The AO concluded that the assessee had reduced and diverted its taxable income by paying higher interest to related concerns, which was not wholly and exclusively incurred for business purposes. The CIT(A) upheld this view, noting that the assessee's own funds were exhausted in investments, and loans were given out of borrowed funds. The CIT(A) held that lending money at a lower rate while borrowing at a higher rate contradicted the business's nature, justifying the disallowance under Section 40A.2. Addition of Notional Interest Income on Interest-Free Advances:The AO added Rs. 9,53,266/- as notional interest income on interest-free advances to M/s. Bir Plantation Pvt. Ltd., reasoning that the assessee did not have sufficient shareholders' funds and the advances were made from borrowed funds. The CIT(A) confirmed this addition, stating that the assessee incurred significant interest expenses on borrowed funds and provided interest-free loans to group companies without commercial expediency. The CIT(A) cited various judicial precedents to support the disallowance of interest expenditure claimed by the assessee.Tribunal's Findings:The Tribunal noted that the assessee, engaged in financing, paid higher interest rates on borrowings while lending at lower rates or interest-free. The Tribunal emphasized that the excess interest expenditure could only be allowed if the assessee established business expediency for advancing money at lower or no interest. The assessee failed to demonstrate such expediency. The Tribunal upheld the lower authorities' findings that the loans were given out of borrowed funds, as the assessee's own funds were insufficient for the advances made.The Tribunal referenced the Supreme Court's decision in SA Builders Ltd. vs. CIT, which allows interest deductions on borrowed loans advanced to sister concerns under business expediency. However, the Tribunal found that the assessee did not meet the criteria outlined in this precedent, as no business expediency was established.Conclusion:The Tribunal dismissed the appeals for both assessment years 2009-10 and 2010-11, affirming the disallowance of interest expenses and the addition of notional interest income. The Tribunal held that the assessee failed to prove that the advances were made out of interest-free funds or that there was a business expediency for lending at lower or no interest. The decisions of the lower authorities were upheld, and the appeals were deemed devoid of merit.