2021 (10) TMI 676 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on interest expenses deduction under Income Tax Act

A.C.I.T., Circle-2, Alwar. Versus Kishan Lal Agarwal, Prop. -M/s Shree Balaji Cattle Feeds, Alwar

The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision to delete the disallowance of Rs. 2,28,000/- under Section 36(1)(iii) of the ... Disallowance u/s 36(1)(iii) - interest payment by the assessee on notional basis - HELD THAT:- In this case, the assessee had made advances/loans by expecting to establish business connections with the above entities. There is no compulsion under the Income Tax Act that interest should always be charged on any lending, nor there is any requirement that income must be earned by utilizing the capital borrowed with interest so as to be entitled to the deduction u/s 36(1)(iii) - keeping in view the relations of the assessee with the above entities, we found that all the above three entities were having direct nexus with the business activities/operations and all these entities also help in the business of the assessee either directly or indirectly by way of procuring/securing orders or selling goods, exploring new markets etc., therefore, we are of the considered view that the ld. CIT(A) has rightly concluded that the amount so advanced by the assessee to these entities were for commercial and business expediency. CIT(A) has passed a speaking and reasoned order discussing all the facts and circumstances as well as legal propositions of law therefore, considering the totality of facts and circumstances and case laws, we find no reason to interfere in the order of the ld. CIT(A) qua this issue, hence, we uphold the same - Appeal of the Revenue is dismissed. Issues Involved:1. Validity of reopening the assessment based on audit objection.2. Justification for deleting the disallowance made under Section 36(1)(iii) of the Income Tax Act, 1961.Detailed Analysis:1. Validity of Reopening the Assessment Based on Audit Objection:The Revenue reopened the assessment under Section 148 of the Income Tax Act, 1961, based on an audit objection. The assessee contested the validity of this reopening, arguing that it was not based on the Assessing Officer's (AO) personal satisfaction but on the audit party's direction. The assessee relied on the Supreme Court's decision in M/s Larsen and Toubro Limited vs. State of Jharkhand, which held that reopening based on an audit party's opinion is not valid if it lacks the AO's independent satisfaction. The Tribunal acknowledged that the reopening was indeed based on an audit objection, thus questioning its validity.2. Justification for Deleting the Disallowance Made Under Section 36(1)(iii):The primary issue was whether the CIT(A) was justified in deleting the disallowance of Rs. 2,28,000/- made under Section 36(1)(iii) of the Act. The AO had added this amount on the grounds that the assessee had advanced interest-free loans totaling Rs. 18,99,999/- while paying interest on unsecured loans. The AO argued that the interest expenses should only be allowed if incurred for business purposes, which the assessee failed to prove.The assessee contended that the advances were made for business purposes, supported by the following points:- Advances to Ridhi Sidhi Cement Pvt Ltd were for business dealings as it was a group company.- Advances to Shree Balaji Agro Industries were to ensure regular supply of goods.- Advances to Shri Jitendra Kumar were for maintaining good business relations as he was a broker facilitating business transactions.The CIT(A) found that the assessee had sufficient interest-free funds amounting to Rs. 45,68,725/- and that the advances were made for business purposes. The Tribunal upheld this view, noting that the advances had a direct nexus with the assessee's business activities. The Tribunal referenced the Supreme Court's decisions in M/s Hero Cycles Pvt. Ltd. and S.A. Builders Ltd. vs. CIT, emphasizing the concept of 'commercial expediency.' It concluded that the advances were made to further the business interests of the assessee and not for personal reasons, thus justifying the deduction of interest expenses under Section 36(1)(iii).Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order to delete the disallowance of Rs. 2,28,000/-. The Tribunal found no reason to interfere with the CIT(A)'s reasoned order, which was based on the facts, circumstances, and legal propositions of the case.Order Pronouncement:The order was pronounced in the open court on 12th October, 2021.