VTP CORPORATION LLP,PUNE vs. INCOME TAX OFFICER WARD 7(1), PUNE

Aggrieved by the order, the assessee has filed an appeal with the CIT(A). Whereas the CIT(A) has considered the grounds of appeal, statements of facts, submissions and finding of the AO but sustained the disallowance of interest u/sec36(1)(iii) of the Act. Aggrieved by the order of the CIT(A), the assessee has filed the appeal before the Hon'ble Tribunal. 5. At the time of hearing, the Ld.AR submitted that the CIT(A) has erred in sustaining the disallowance of differential interest u/sec 36(1)(iii) of the Act overlooking the various submissions and provisions of the Act.. The Ld.AR contentions are that the assessee has received interest from two firms, where the assessee is a partner and it has received interest in the capacity of partner and the provisions section 40(b) of the Act are attracted restricting the interest rate @12%p.a. The assessee has provided the funds to its sister concerns on the business participation / expediency and future growth potential of projects. The CIT(A) has not considered the element of commercial expediency of the transactions with the concerns. The Ld.AR substantiated the submissions with factual paper book and judicial decisions and prayed for allowing the appeal. Per contra, the Ld.DR supported the order of the CIT(A). 6. Heard the rival submissions and perusal the material available on record. The sole crux of the disputed issue envisaged by the Ld.AR that the CIT(A) has erred in sustaining the disallowance of interest u/sec 36(1)(iii) of the Act also observing that the assessee has barrowed unsecured loans at higher rate of interest and the assessee has provided funds at a lower rate to its sister concerns. Whereas the assessee has received interest from two firms, where the assessee is a partner and it has received interest in the capacity of partner and the provisions section 40(b) of the Act are attracted restricting the interest rate @12%p.a.Further the funds provided to its sister concern is on the business participation / expediency and future growth potential of projects and the element of commercial expediency exist in the transactions. The Ld.AR demonstrated the audited financial statements at page 59 and 64 of the paper book. The Ld.AR contentions are that the concept of commercial expediency has to applied and the assessee firm holds @67% share /profit percentage in the M/s VTP Home Land Marks LLP and similarly holds @70.30% share /profit percentage in the M/s VTP Urban Homes LLP. The Ld.AR substantiated the submissions with the copy partnership deeds, audited financial statements and income tax returns filed for A.Y.2013-14. Further the Ld.AR demonstrated the copy of order of CIT(A) for A.Y.2015-16 were the similar addition made on account of the difference of interest paid and interest received is deleted. Further in the A.Y.2022-23, the Assessing officer has accepted the assesses claim and passed the order u/sec143(3) r.w.s144B of the Act. In the present case, the Assessing officer has not doubted the genuineness of interest payment but disallowed interest u/sec 36(1)(iii) of the Act due to differential rate of interest earned and paid. The Honble Supreme Court of India in the case of Hero Cycles (P) Ltd. vs. Commissioner of Income Tax in Civil Appeal No. 514 of 2008 has held: “Business expenditure-Interest on borrowed capital- Interest-free advance to subsidiary company and loans to directors at low rate of interest-Assessee made interest- free advance to its subsidiary company HF Ltd. as a matter of business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to HF Ltd. to meet the working capital for meeting any cash losses- Moreover, subsequently, assessee company off-loaded its shareholding in HF Ltd. to various companies of OS Group and at that time, the assessee company not only received back the entire loan given to HF Ltd. but this was refunded with interest and the same was shown as income and offered for tax-Insofar as the loans to directors are concerned, the assessee had a credit balance in the bank account when the said advance of Rs. 34 lakhs was given- Assessee company had reserve/surplus to the tune of almost Rs. 15 crores-Assessee company could in any case, utilise those funds for giving advance to its directors- Therefore, no part of interest paid by the assessee on the borrowings could be disallowed-CIT vs. Hero Cycles (P) Ltd. (judgment of the Punjab & Haryana High Court dt. 6th Dec., 2006) set aside; S.A. Builders Ltd. vs. CIT(A) (2006) 206 CTR (SC) 631: (2007) 288 ITR 1 (SC) applied ii) Similarly, the Honble Supreme Court of India in the case of S.A. Builders Ltd. Vs Commissioner of Income Tax (Appeals), Chandigarh in Civil Appeal Nos. 5811 and 5812 of 2006 has held: “Section 36(1) (iii) of the Income-tax Act, 1961 Assessment years 1990-91 and 1991-92 - Whether borrowed fund advanced to a third party should be for commercial expediency, if it is sought to be allowed under section 36(1)(iii) - Held, yes - Assessee borrowed fund from bank and advanced part of it to its sister concern (a subsidiary) as interest-free loan Assessing Officer disallowed interest under section 36(1)(iii) on borrowings to extent those were advanced to subsidiary - Tribunal as well as High Court upheld order of Assessing Officer - Whether since neither High Court nor Tribunal and other authorities had examined whether amount advanced to sister concern was by way of commercial expediency, matter was to be remanded to Tribunal for a fresh decision in accordance with law - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of -Assessment years 1990-91 and 1991-92 - Whether expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency - Held, yes” iii) The High Court of Gujarat in the case of Commissioner of Income-tax, Ahmedabad-I vs. Cornerstone Exports (P.) Ltd. in Tax Appeal No. 240 of 2007 held; “Section 36(1) (iii) of the Assessment year 1995-96 Assessee-company borrowed certain sum from various group companies and such funds were advanced to other group companies at much lower interest rate than interest rate on borrowed funds It claimed deduction under section 36(1)(iii) on interest paid on borrowings Whether though section 36(1)(iii) permits deduction of interest paid on capital borrowed for purpose of business or profession and expression 'for purpose of business' is wider than expression 'for purpose of earning income', assessee has to point out business expediency which prompted assessee to make advances at a lower rate of interest - Held, yes - Whether since action of assessee-company to make advances at a lower rate of interest than interest rate at which it borrowed such funds was not shown to be in any manner actuated by business expediency, such component of interest was rightly disallowed -Held, yes [Paras 13 and 15] [In favour of revenue]. 7. Therefore, considering the facts, circumstances, submissions and the ratio of the judicial decisions dealt and follow the judicial precedence and there exist business expediency in the assesses transactions. Accordingly, set aside the order of the CIT(A) and direct the assessing officer to delete the disallowance and the grounds of appeal are allowed in favour of the assessee. 8. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on 28th July, 2026.