2019 (1) TMI 1393 - HC - Income Tax

Court Upholds Disallowance of Interest Expense for Business Purposes

The Court dismissed the Revenue's appeal regarding the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961. It upheld the ... Disallowance u/s 36(1)(iii) - providing loan to its subsidiary and not reporting interest on it - commercial expediency - Held that:- As decided in Commissioner of Income Tax vs. Dalmia Cement (Bharat) Ltd [2001 (9) TMI 48 - DELHI HIGH COURT] once it is business, revenue cannot justifiable claim to put itself in the armchair of the businessman and assume the role to decide how much is reasonable expenditure having regarding to the circumstances of the case, No businessman can be compelled to maximize its profits. The authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. We have to see the transfer of the borrowed funds to the sister concern from the point of view of commercial expediency and not form the point of view whether the amount was advances for earning the profit The grounds of commercial expedience are now well established in tax jurisprudence. The position of the CIT(A) and its affirmation by the ITAT are essentially based upon a fact appreciation that the assessee forewent interest. As to whether there was an element of sacrifice and if so, for what purpose, is not for the Court to consider, given that the loans obtained by the assessee were for its business purposes. There is nothing on record to dispel/undermine the findings of the lower Appellate Authorities that commercial expedience dictated the nature of the transactions. - Decided against revenue Issues involved:1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.2. Interpretation of commercial expedience in relation to loans and advances for business purposes.Analysis:Issue 1: Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961:The case involved the Revenue's appeal against the ITAT's decision rejecting its claim regarding the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961. The Revenue contended that the assessee's claim for providing a loan to its subsidiary without reporting interest was wrongly based on commercial expedience, contrary to the Revenue's argument that the amounts were disallowable under the said section. The AO disallowed an amount under Section 36(1)(iii), but the CIT(A) accepted the assessee's appeal, citing the decision in Commissioner of Income Tax vs. Dalmia Cement (Bharat) Ltd. The ITAT affirmed the decision of the CIT(A), emphasizing that the loans obtained by the assessee were for its business purposes, and there was no need for the Court to consider the element of sacrifice involved.Issue 2: Interpretation of commercial expedience in relation to loans and advances for business purposes:The judgment highlighted the concept of commercial expedience in tax jurisprudence concerning loans and advances given for business purposes. The CIT(A) and ITAT based their decisions on the fact that the assessee forewent interest for commercial reasons, and there was no need to question the purpose of the sacrifice made by the assessee. The lower Appellate Authorities found that commercial expedience dictated the nature of the transactions, and there was no evidence to undermine this finding. Ultimately, the Court dismissed the appeal, stating that no question of law arose in the case.In conclusion, the judgment addressed the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961, and provided insights into the interpretation of commercial expedience in relation to loans and advances for business purposes. The decision emphasized the importance of commercial considerations in determining the allowability of expenses and highlighted the deference given to lower Appellate Authorities' findings in such matters.