Commercial expediency, TDS disallowance, and land-use conversion costs: ITAT sustains major tax additions with one remand.

Interest on borrowed funds diverted to sister concerns without demonstrated commercial expediency was held disallowable, while the claim relating to interest attributable to assets not yet put to use was remanded for fresh factual verification. Section 40(a)(ia) was applied to uphold disallowance of interest paid to NBFCs without tax deduction at source, including amounts actually paid during the year. Conversion charges and related interest for change of land use were not treated as depreciation-eligible expenditure or allowable revenue deduction, and the additional ground on that claim was rejected for requiring fresh factual inquiry. Major disallowances were sustained, subject only to limited remand.

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Issues: (i) disallowance of interest on interest-free advances to sister concerns on the ground of absence of commercial expediency; (ii) disallowance under the proviso to section 36(1)(iii) relating to interest attributable to assets not put to use; (iii) disallowance under section 40(a)(ia) in respect of interest paid to NBFCs without deduction of tax at source; (iv) allowability of conversion charges and related interest paid for change of land use as revenue expenditure or as depreciation-eligible expenditure, including admission of the additional ground.

Issue (i): disallowance of interest on interest-free advances to sister concerns on the ground of absence of commercial expediency.

Analysis: The assessee did not establish a direct nexus between borrowed funds and a business purpose for the advances. The record did not show demonstrable commercial expediency, and the advances appeared to have been made to related concerns without adequate business justification. Interest on borrowed funds diverted for non-business purposes remains disallowable.

Conclusion: Decided against the assessee. The disallowance of proportionate interest on interest-free advances was upheld.

Issue (ii): disallowance under the proviso to section 36(1)(iii) relating to interest attributable to assets not put to use.

Analysis: The issue turned on verification of the assessee's claim of suo motu disallowance and the correctness of the computation relating to assets not put to use. The Tribunal found that further factual verification by the Assessing Officer was before a final determination could be made.

Conclusion: Decided partly in favour of the assessee. The matter was remanded to the Assessing Officer for fresh verification and adjudication.

Issue (iii): disallowance under section 40(a)(ia) in respect of interest paid to NBFCs without deduction of tax at source.

Analysis: The Tribunal applied the settled principle that section 40(a)(ia) covers not only amounts remaining payable at year-end but also amounts actually paid during the year without deduction of tax at source. The plea based on the payability distinction was rejected, and the contention that tax had been paid by the recipient was not entertained for want of supporting material.

Conclusion: Decided against the assessee. The disallowance under section 40(a)(ia) was upheld.

Issue (iv): allowability of conversion charges and related interest paid for change of land use as revenue expenditure or as depreciation-eligible expenditure, including admission of the additional ground.

Analysis: The additional ground required fresh factual inquiry and was not a pure question of law, so it was not maintainable. On merits, the conversion charges were linked to land use rights attached to ownership of land, not to a depreciable building or structure, and the assessee, being a lessee, could not claim depreciation on such expenditure. The alternative claim under sections 37(1) and 36(1)(iii) also failed for want of the necessary business nexus.

Conclusion: Decided against the assessee. The additional ground was rejected and the substantive claim for allowance of the conversion charges and related interest failed.

Final Conclusion: The appeals were disposed of by sustaining the major disallowances, remitting only the limited issue relating to assets not put to use for verification, and rejecting the additional claim concerning conversion charges.

Ratio Decidendi: Interest on borrowed funds diverted without proved commercial expediency is disallowable; section 40(a)(ia) applies to both paid and payable amounts; and expenditure linked to land-use conversion does not become depreciation-eligible merely because it facilitates business use of leased land.

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