2022 (10) TMI 605 - AT - Income Tax

Tribunal upholds disallowance of interest on loans to sister concerns

M/s Avantika Infraventures (P) Ltd. Versus DCIT, Central Circle, Varanasi

M/s Avantika Infraventures (P) Ltd. Versus DCIT, Central Circle, Varanasi - TMI Issues Involved:1. Disallowance of interest on loans advanced to sister concerns.2. Whether the loans were made out of interest-bearing funds.3. Commercial expediency of the loans.4. Additions based on hypothetical situations.5. Charging of interest under Section 234A of the Income Tax Act.Detailed Analysis:Disallowance of Interest on Loans Advanced to Sister Concerns:The primary issue in these appeals for the assessment years 2012-13 and 2013-14 is the disallowance of the claim of deduction of interest for advancing interest-free loans to sister concerns. The Assessing Officer (AO) issued a show-cause notice to the assessee regarding the disallowance under Section 36(1)(iii) of the Income Tax Act, arguing that the borrowed funds were not utilized for the assessee's business but were used for advancing interest-free loans to sister concerns. The AO made a disallowance of Rs. 12,10,134/- as proportionate interest expenditure. The assessee's contention that the loans were for commercial expediency was not accepted by the AO or the Commissioner of Income Tax (Appeals) [CIT(A)].Whether the Loans Were Made Out of Interest-Bearing Funds:The AO found that the interest-free advances were given directly from the term loan account with Punjab National Bank (PNB), indicating that interest-bearing funds were used for these advances. The assessee's claim that it had sufficient interest-free funds was contradicted by the facts on record. The AO's findings were based on independent evidence from the term loan account, which the assessee did not dispute.Commercial Expediency of the Loans:The assessee argued that the loans to sister concerns were for business purposes and relied on the Supreme Court's decision in S.A. Builders Ltd. vs. CIT(A), which allows interest deductions on borrowed funds if advanced for commercial expediency. However, the assessee failed to provide any factual basis or evidence to establish commercial expediency or business necessity for these loans. The CIT(A) upheld the AO's disallowance, noting that the assessee did not demonstrate how the loans advanced to sister concerns were for the preservation, protection, or advancement of its business.Additions Based on Hypothetical Situations:The assessee contended that the additions were based on hypothetical situations, surmises, conjectures, and personal presumptions without proper verification or consideration of material and details on record. However, the AO and CIT(A) found that the assessee did not provide sufficient evidence to support its claims, and the disallowance was based on concrete facts and legal principles.Charging of Interest Under Section 234A:The assessee also contested the AO's decision to charge interest under Section 234A of the Income Tax Act while computing the demand. However, this issue was not elaborated upon in the judgment, indicating that it was not a significant point of contention in the appeals.Conclusion:The Tribunal dismissed the appeals of the assessee for the assessment years 2012-13 and 2013-14, upholding the disallowance of interest on loans advanced to sister concerns. The Tribunal found no error or illegality in the CIT(A)'s order and concluded that the assessee failed to establish commercial expediency or business necessity for the interest-free loans. The decision was pronounced in virtual court proceedings on 13.10.2022 at Allahabad, U.P.