2022 (2) TMI 472 - AT - Income Tax

Tribunal allows interest expense, emphasizes evidence required for disallowance

Mukesh Kumar Versus ITO, Ward-1, Fatehabad.

The Tribunal overturned the disallowance of interest expense by the Assessing Officer and the confirmation by the Commissioner of Income Tax (Appeals). It ... Addition u/s 40A - Addition made as assessee could not explain the reasons for payment of interest to the business creditors that too sister concerns whereas it is not charging any interest from the debtor - HELD THAT:- Trading transactions are genuine and accepted as such, then, disallowance of expenditure is not in accordance with law. It is also his submission that the assessee has received interest and has also paid interest @ 15% to the sister concerns and only the net interest has been debited to the Profit & Loss Account. From the various details furnished by the assessee in the paper book, it is noted that the assessee has paid interest as well as received interest from both the sister concerns, namely, M/s Samjhai Nath Industries and Saraswati Ginning Pressing & Oil Mills. Further, the transactions with the parties have not been doubted and these are business transactions. The AO has also not brought anything on record to the effect that the assessee has violated the provisions of section 40A(2)(b) - Hon’ble Supreme Court in the case of SA Builders [2006 (12) TMI 82 - SUPREME COURT] has held that once the assessee establishes that there was a nexus between expenditure and the purpose of business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the Board of Directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case.- Decided in favour of assessee. Issues Involved:1. Disallowance of interest expense by the Assessing Officer (AO).2. Confirmation of disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)].3. Assessee's appeal against the disallowance and confirmation.Detailed Analysis:1. Disallowance of Interest Expense by the AO:The assessee filed a return of income declaring taxable income of Rs. 3,12,270 for the assessment year 2016-17. During the assessment proceedings, the AO noted that the assessee, engaged in wholesale trading of oil seed, cotton, guar, and as a commission agent, received a commission of Rs. 26,78,036 and claimed a deduction of Rs. 22,89,134 on account of interest. The AO observed that the assessee paid interest of Rs. 19,91,170 to M/s Samjhai Nath Industries and Rs. 2,92,764 to Saraswati Ginning Pressing & Oil Mills, both sister concerns, but did not charge interest from debtors amounting to Rs. 96,20,818. The assessee explained that interest was paid at the prevailing market rate and TDS was duly deducted. The AO, unsatisfied with the explanation, disallowed the interest expense of Rs. 22,89,134.2. Confirmation of Disallowance by the CIT(A):The CIT(A) upheld the AO's decision, noting that the arrangement of paying interest to sister concerns appeared to be a diversion of income. The CIT(A) found the interest rate higher than usual trade practices and unsupported by documentation from the Vyapar Mandal Association. The CIT(A) concluded that the disallowance was justified, dismissing the grounds of appeal.3. Assessee's Appeal Against the Disallowance and Confirmation:The assessee contended that the trading transactions were genuine and accepted as such, and the interest was both received and paid at the same rate of 15%. The assessee argued that the burden of proof under section 40A(2)(b) of the Act lay with the AO, and the disallowance was untenable without establishing the conditions. The assessee cited several judicial precedents, including decisions from the Hon'ble Delhi High Court and the Hon'ble Supreme Court, supporting the argument that genuine business transactions should not be disallowed.Tribunal's Decision:The Tribunal considered the rival arguments, the orders of the AO and CIT(A), and the judicial precedents cited. The Tribunal found that the assessee had indeed paid and received interest from the sister concerns and that the transactions were genuine business transactions. It noted that the AO had not demonstrated any violation of section 40A(2)(b) of the Act. Citing the Hon'ble Supreme Court's decisions in SA Builders Ltd. and Hero Cycles (P) Ltd., the Tribunal emphasized that the Revenue cannot dictate the reasonableness of business expenditure if a nexus between the expenditure and the purpose of business is established.Conclusion:The Tribunal concluded that no interest could be disallowed, setting aside the CIT(A)'s order and directing the AO to delete the penalty. The appeal filed by the assessee was allowed, and the decision was pronounced in the open court on 22.09.2021.