2021 (4) TMI 665 - AT - Income Tax

Tax Tribunal Sides with Assessee on Interest Expenditure, Emphasizes Financial Transaction Analysis

The Court upheld the CIT(A)'s decision to allow the interest expenditure claimed by the assessee, finding a direct nexus between the interest income and ... Disallowance of interest - As interest earned by the assessee would be assessable as income from other sources and the netting off of the interest cost could not be allowed - HELD THAT:- As certain assets as well as liabilities delved upon assessee pursuant to agreement dated 30/03/2013 with its holding company wherein it was agreed that Lohegaon project would be carried out by the assessee. The differential of assets and liabilities was treated as loan from M/s BEBL to the assessee for which the assessee paid interest expenditure of ₹ 398.52 Lacs during the year. The assessee also earned interest income from loan granted by its holding company to M/s GBL which was also transferred to the assessee under the said agreement. The net interest, thus earned, has been offered to tax. We find that there is clear nexus between the interest income as well as interest expenditure. As rightly noted by Ld. CIT(A), it was not the case the case where the funds were borrowed for the purpose of business and the excess funds were parked by the company for earning interest income. This was a case where the funds for the Lohegaon project were transferred separately and the loan to GBL in the books of the holding company was transferred to the assessee along with equal liability. There was a direct nexus of loan (asset) with loan (liability) in the books of the assessee company. These findings remain undisturbed before us also. Therefore, we find no reason to interfere in the impugned order. The appeal stand dismissed. Facts are pari-materia the same in AY 2015-16 wherein interest income has been assessed under the head Income from Other sources whereas interest expenditure has been disallowed while framing an assessment on 28/12/2017. The Ld. AO follows the logic of AY 2014-15. The Ld. CIT(A) deleted the disallowance on similar findings, against which the revenue is in further appeal before us. Facts and issues being identical, following our adjudication as for AY 2014-15, we dismiss the appeal. Issues:1. Disallowance of interest expenses.2. Nexus between interest income and interest expenditure.Analysis:1. The appeals for Assessment Years 2014-15 & 2015-16 were heard together due to common facts and issues. The dispute in AY 2014-15 revolved around the disallowance of interest expenses amounting to Rs. 398.52 Lacs. The Assessing Officer disallowed the interest expenditure claimed by the assessee, stating that the interest earned by the assessee should be assessed as income from other sources. However, the CIT(A) deleted the disallowance after considering the factual matrix and financial statements of the assessee.2. The interest disallowance stemmed from an agreement between the assessee and its holding company, wherein certain assets and liabilities were transferred to the assessee. The interest expenditure paid by the assessee was related to the interest earned on advances given to another company. The CIT(A) found a direct nexus between the interest income and expenditure, concluding that the interest paid to the holding company was an allowable expenditure against the interest income received. The Tribunal upheld the CIT(A)'s decision, emphasizing the direct connection between the loan assets and liabilities in the books of the assessee company.3. In the AY 2015-16, a similar issue arose where interest income was assessed under the head of Income from Other Sources, and interest expenditure was disallowed by the Assessing Officer. The CIT(A) once again ruled in favor of the assessee, leading to the revenue's further appeal. The Tribunal, following the same reasoning as in AY 2014-15, dismissed the appeal for AY 2015-16 as well, given the identical facts and issues.4. The Tribunal's decision in both appeals was based on the clear nexus established between the interest income and expenditure, as evidenced by the transfer of assets and liabilities between the assessee and its holding company. The judgments highlighted the importance of analyzing the specific circumstances and financial transactions to determine the allowability of expenses against income.