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Facts
The assessee company, UFX Ventures Pvt. Ltd., engaged in publishing, leasing, and trading, filed appeals against orders confirming the disallowance of interest expenses. The disallowance pertained to loans obtained for business purposes, which the Assessing Officer (AO) deemed to have been used for interest-free advances to related parties.
Held
The Tribunal held that for advances made to associate concerns, the allowability of interest expenditure should be examined with reference to the interest paid on borrowings versus the interest charged on advances to related parties. For advances to directors and key managerial personnel, where commercial expediency was not established, proportionate interest was to be disallowed.
Key Issues
Whether the disallowance of interest expenditure is justified when loans were obtained for business purposes but allegedly advanced as interest-free loans to related parties, and whether commercial expediency was established for such advances.
Sections Cited
250, 143(3), 37, 36(1)(iii), 14A, Rule 8D(2)(ii)
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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
आदेश/ O R D E R
PER S.R. RAGHUNATHA, AM:
These appeals filed by the assessee are directed against two orders of Commissioner of Income Tax (Appeals), National Faceless
Appeal Centre (NFAC), Delhi, both dated 07.04.2025 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the
Act’). The relevant Assessment Years are 2013-14 & 2014-15. (AY 2013-14)
The grounds raised by the assessee read as follows:-
1. The order of the learned Commissioner of Income Tax (Appeal), NFAC is erred in confirming disallowance of interest expenses of Rs. 2,73,73,313/-.
2. The learned CIT (A) was unjustified in not considering the submission of the Appellant that interest on term loan sanctioned for acquiring specific assets cannot be disallowed as the term loans were utilised by the Appellant for the purpose of acquiring specific assets.
3. The learned CIT (A) is not justified in confirming the disallowance of interest on term loans without any specific finding that the term loans were diverted and utilised for giving interest free loans.
4. The learned CIT(A) failed to consider the fact that the Appellant had taken interest free unsecured loans amounting to Rs. 7.67 crores from relatives and friends and therefore, the entire loan advanced to related parties cannot be from interest bearing funds and hence the disallowance of entire interest is unjustified, illegal and arbitrary.
5. The learned CIT(A) did not consider the fact that the loans were advanced to sister concerns in the normal course of business and therefore, disallowance of interest is not justified as per judicial precedence.
Brief facts of the case are as follows: The assessee is a company engaged in the business of publishing newspapers, leasing of film projectors, trading of mobile phones and set top boxes. It is also rendering business consultancy services. For the assessment year 2013-14, the return of income was filed on 31.03.2015 declaring loss of Rs.59,99,532/-. The assessment was completed under :- 3 -:
& 2273/CHNY/2025 section 143(3) of the Act vide order dated 30.03.2016. In the assessment order, the AO made additions amounting to Rs.2,91,00,718/- under various heads, including disallowance of interest expenditure amounting to Rs.2,74,49,888/-.
4. Aggrieved, assessee filed appeal before the First Appellate Authority (FAA). As regards interest disallowance of Rs.2,74,49,888/-, the FAA partly-allowed the ground. The FAA noticed that interest on home loan of Rs.76,575/- was self- disallowed by assessee and balance of Rs.2,73,73,313/- was sustained (2,74,49,888 – 76,575). The relevant finding of the FAA read as follows:-
5.1.4 The contentions of the appellant and the facts of the case have been taken into consideration. It is the claim of the appellant that apart from interest on OD of Rs. 69,52,985/-, other interest expenditure cannot be disallowed in its hand as the other loans are utilized for the purposes for which they were taken; for example, vehicle loan has been utilized for buying the vehicle, and also majority of the said loans amounting to Rs. 7,67,09,493/- were taken in the year(s) preceding to the concerned F.Y. In this regard, it is pertinent to mention that the appellant has not brought on record any documentary evidence to substantiate its claim as to whether or not the impugned loans have been used for the purposes for which they are disbursed to it. Further, it is also not the claim of the appellant that interest- free loans were given to its related parties out of interest-free funds available with it. In this scenario, it cannot be disputed that its interest bearing funds were utilized by the appellant for extending interest-free funds to its related parties. For the issue under deliberation i.e. whether or not interest expenditure claimed by the appellant is allowable in its hands u/s. 37 of the Act, it is incumbent on the appellant to establish that interest-free loans were given to its related parties out of interest-free funds available & 2273/CHNY/2025 with it and not out of interest bearing funds. For this, the fact that some of the loans were received by the appellant in the year(s) preceding to the concerned F.Y. is immaterial and does not come to the to its aid. The AO has clearly established that the interest bearing loans outstanding as on 31.03.2013 in the Balance Sheet of the appellant were less than interest-free loans that were given to its related parties, and nothing has been brought on record by the appellant to demonstrate that sufficient interest-free funds were available with it so as to enable it to grant interest-free loans to its related parties. It has also not been demonstrated by the appellant that funds made available to its related parties were for any business purpose against which any income has accrued to it during the concerned year. Therefore, in this scenario the entire interest expenses debited by the appellant to its Profit and Loss Account are liable for disallowance.
5.1.5 Further, the claim of the appellant that it has self-disallowed interest on home loans of Rs.76,575/- and interest on unsecured loan and term loan of Rs.5,37,011/-, total amounting to Rs.6,13,586/- in its computation of Total Income, is also found to be partially correct. The computation of Total Income filed by the appellant is reproduced hereunder: ……. …… From this computation, it can be clearly seen that only interest on home loans of Rs.76,575/- has been self-disallowed by the appellant. Therefore, addition to the extent of R.76,575/- stands deleted and the balance addition of Rs.2,73,73,313/- on account of interest expense u/s.37 of the Act is confirmed. Accordingly, the ground of appeal raised by the appellant is partly allowed.”
5. Aggrieved, assessee is in appeal before us. The Ld. AR submitted that the assessee had debited interest expenditure of Rs.2,74,49,888/- in the Profit & Loss account in respect of loans obtained from banks in earlier years for business purposes. Out of the total interest expenditure, an amount of Rs.70,20,645/- pertains to interest on overdraft account and loan against fixed & 2273/CHNY/2025 deposits availed for working capital purposes, whereas the balance amount of Rs.2,04,29,493/- relates to interest on term loans sanctioned for acquisition of capital assets such as machinery, vehicles and other fixed assets and also housing loan availed in earlier years. It was submitted that even assuming that interest- free advances were given to related parties, the same could only be out of the overdraft facility or loan against fixed deposit and not out of term loans which were specifically sanctioned for acquisition of assets. However, the Assessing Officer without appreciating this distinction disallowed the entire interest expenditure, which was partly- confirmed by the FAA. The Ld. AR further submitted that the assessee had already disallowed interest expenditure of Rs.5,37,011/- in the return of income for non-deduction of TDS.
However, the Assessing Officer without considering the said disallowance again disallowed the entire interest expenditure resulting in double disallowance to that extent. It was further contended that the advances given to sister concerns were out of commercial expediency as the business of the assessee was largely dependent on the support services rendered by those concerns. The advances were periodically adjusted against the cost of such services. In support of the contention that interest cannot be disallowed where advances are made to sister concerns on account & 2273/CHNY/2025 of commercial expediency, the Ld. AR relied on the judgment of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (288 ITR 1) and the judgment of the Hon’ble Punjab & Haryana High Court in Bright Enterprises Pvt. Ltd. vs. CIT reported in [2015] (11)
TMI 342] as well as other judicial precedents including the decision of the Chennai Tribunal in TT Holding & Services Pvt. Ltd. vs. ACIT in (order dated 27.11.2015)
The Ld.DR relied on the orders of the AO and the FAA.
We have heard the rival submissions and perused the materials available on record. The issue involved in the present appeal relates to the disallowance of interest expenditure amounting to Rs.2,74,49,888/- made by the AO. The FAA confirmed the addition of Rs.2,73,73,313/-. The contention of the assessee is that the borrowings consist of term loans obtained for acquisition of capital assets and overdraft facilities for working capital requirements and therefore the entire interest expenditure cannot be considered for disallowance on account of advances made to related parties. It is also the claim of the assessee that a portion of the interest expenditure had already been disallowed in the return of income on account of non-deduction of TDS. & 2273/CHNY/2025
From the materials placed on record, it is clear that the assessee has given loans and advances to related parties totalling to Rs.15,55,15,645/-, out of which advances to associate concerns amounting to Rs.14,02,29,667/- and the balance amount of Rs.1,52,85,978/- represents advances given to directors and key managerial personnel. The assessee has claimed that it had sufficient own interest free funds amounting to Rs.16,10,03,361/- for making such advances. In this context, the Ld.AR took us through the financials for relevant year. We are of the view if assessee is having own interest free funds then interest free advances to sister concern does not call for disallowance of interest expenditure. Therefore, the AO is directed to examine the claim of the assessee as to whether the assessee had sufficient own funds (interest free funds) for the purpose of making interest-free loans and advances to related parties.
However, as regards the diversion of funds for amounts and advances given to directors and key managerial personnel, there is nothing on record to suggest that these advances / loans were made out of commercial expediency for the purpose of assessee’s business. Hence, to the extent of loans advanced to directors and :- 8 -:
& 2273/CHNY/2025 key managerial personnel, proportionate interest shall be disallowed for such diversion.
In view of the above facts and circumstances, we deem it appropriate to restore the issue to the file of the Assessing Officer for fresh examination of the claim of the assessee with regard to availability of own funds, advances made to associate concerns and the advances made to directors and key managerial personnel. The Assessing Officer shall recompute the disallowance, if any, in accordance with law after affording reasonable opportunity of being heard to the assessee. The assessee is also directed to co-operate with the proceedings and furnish necessary details as may be called for.
Accordingly, the ground raised by the assessee is partly-allowed for statistical purposes.
The grounds raised read as follows:-
1. The order of the learned Commissioner of Income Tax (Appeal), NFAC is erred in confirming disallowance of interest expenses of Rs. 1,98,35,123/-
2. The learned CIT (A) was unjustified in not considering the submission of the Appellant that interest on term loan sanctioned for acquiring specific & 2273/CHNY/2025 assets cannot be disallowed as the term loans were utilised by the Appellant for the purpose of acquiring specific assets.
3. The learned CIT (A) is not justified in confirming the disallowance of interest on term loans without any specific finding that the term loans were diverted and utilised for giving interest free loans.
The learned CIT(A) failed to consider the fact that the Appellant had taken interest free unsecured loans amounting to Rs. 8.53 crores from relatives and friends and therefore, the entire loan advanced to related parties cannot be from interest bearing funds and this disallowance of entire interest is unjustified, illegal and arbitrary.
The learned CIT(A) did not consider the fact that the loans were advanced to sister concerns in the normal course of business and therefore, disallowance of interest is not justified as per judicial precedence.
Brief facts of the case are as follows: For the assessment year 2014–15, the return of income was filed on 30.03.2016 declaring ‘nil’ income after setting off the brought forward loss of Rs.19,75,030/-. The assessment was completed u/s.143(3) of the Act vide order dated 20.12.2016. The AO made additions aggregating to Rs.2,15,39,118/- under various heads, including disallowance of interest expenditure amounting to Rs.1,98,35,123/-.
As regards disallowance of interest expenditure amounting to Rs.1,98,35,123/-, the AO held that assessee has extended interest- free loans to its related parties of Rs.14,08,48,095/- which was greater than the interest bearing loans availed by it from banks amounting to Rs.10,25,81,313/-. Accordingly, the AO was of the :- 10 -:
& 2273/CHNY/2025 opinion that the entire interest expenses debited by to its Profit and Loss account of Rs.2,03,20,717/- was liable for disallowance u/s.37 of the Act. However, as interest of Rs.4,85,594/- was already disallowed by the assessee u/s.14A read with Rule 8D(2)(ii), the AO proceeded to disallow the balance sum of Rs.1,98,35,123/- on this count.
Aggrieved, assessee filed appeal before the FAA. The FAA confirmed the disallowance made by the AO.
Aggrieved, assessee is in appeal before the Tribunal. The Ld. AR submitted that the assessee had debited interest expenditure of Rs.2,03,20,717/- in the Profit & Loss account in respect of various loans availed from banks. Out of the total interest expenditure, an amount of Rs.77,40,578/- pertains to interest on overdraft account and loan against fixed deposits availed for working capital purposes, whereas the balance amount of Rs.1,25,80,139/- relates to interest on term loans sanctioned for acquisition of capital assets such as machinery, vehicles and other fixed assets, housing loans availed in earlier years and loan processing charges. It was contended that even assuming that interest-free advances were given to related parties, the same could only be out of the overdraft facility or loan & 2273/CHNY/2025 against fixed deposits and not out of term loans which were specifically sanctioned for acquisition of assets. However, the Assessing Officer without appreciating this distinction disallowed the entire interest expenditure, which was confirmed by the Ld. CIT(A).
The Ld. AR further submitted that the assessee had already disallowed an amount of Rs.5,37,011/- towards interest expenditure in the return of income on account of non-deduction of TDS.
However, the Assessing Officer without considering the same again disallowed the entire interest expenditure, resulting in double disallowance to that extent. It was further submitted that the advances given to related parties were out of commercial expediency as the business of the assessee was largely dependent on the support services rendered by the sister concerns and such advances were periodically adjusted against the cost of such services.
The Ld. AR also submitted that the assessee had charged interest amounting to Rs.46,37,360/- on the advances extended to related parties during the relevant previous year and the same was offered as income in the Profit & Loss account. Therefore, it was contended that when the assessee has charged interest on such :- 12 -:
& 2273/CHNY/2025 advances, the disallowance of interest expenditure claimed by the assessee is not justified.
The Ld. AR further placed reliance on the provisions of section 36(1)(iii) of the Act and submitted that interest paid on capital borrowed for the purpose of business is allowable as deduction. Reliance was also placed on various judicial precedents including the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (288 ITR 1), the decision of the Hon’ble Punjab & Haryana High Court in Bright Enterprises Pvt. Ltd. vs. CIT, the decision of the Chennai Tribunal in TT Holding & Services Pvt. Ltd. vs. ACIT and other decisions of the Hon’ble High Courts wherein it has been held that interest on borrowed funds cannot be disallowed where advances are made to sister concerns on account of commercial expediency. Accordingly, the Ld. AR prayed that the disallowance of interest expenditure confirmed by the FAA may kindly be deleted.
The Ld.DR supported the orders of the AO and the FAA.
We have heard the rival submissions and perused the materials available on record. The issue involved in the present & 2273/CHNY/2025 appeal relates to the disallowance of interest expenditure under section 36(1)(iii) of the Income Tax Act, 1961. The Ld. AR submitted that the assessee had incurred interest expenditure on loans obtained from banks and financial institutions for the purpose of business. It was also contended that certain advances were made to related parties and the assessee has charged interest on such advances amounting to Rs.46,37,360/-, which has been duly offered to tax. According to the Ld. AR, therefore, the disallowance of the entire interest expenditure is not justified.
From the submissions made before us, it is evident that the assessee itself admits that certain funds were diverted to associated concerns and interest has been charged on such advances.
Therefore, to the extent the assessee admits that the funds were diverted to associated concerns and interest has been charged thereon, the same cannot automatically justify the allowability of the entire interest expenditure claimed by the assessee. In our considered opinion, the allowability of interest expenditure has to be examined with reference to the interest paid by the assessee on its borrowings vis-à-vis the interest charged by the assessee on the advances made to the related parties. & 2273/CHNY/2025
Therefore, to the extent of the difference between the interest paid by the assessee on borrowed funds and the interest charged by the assessee on the loans or advances given to the related parties, such differential amount would represent the cost of funds diverted and the same is liable to be disallowed u/s.36(1)(iii) of the Act.
Further, with regard to the advances made to directors and key managerial personnel, we find that there is nothing placed on record to demonstrate that such advances were made out of commercial business expediency. The assessee has not produced any material to establish that such advances were in furtherance of the business interests of the assessee. In the absence of any evidence to show commercial expediency, the diversion of borrowed funds to directors and key managerial personnel cannot be considered as having been made for the purposes of business.
Accordingly, to the extent of loans or advances diverted to directors and key managerial personnel, the corresponding interest attributable to such diversion of funds shall be disallowed u/s.36(1)(iii) of the Act. & 2273/CHNY/2025
In view of the above observations, the issue is restored to the file of the Assessing Officer to recompute the disallowance of interest expenditure in accordance with the directions given above after providing adequate opportunity of being heard to the assessee.
Accordingly, the ground raised by the assessee is partly- allowed for statistical purposes.
In the result, the appeals filed by the assessee are partly-allowed for statistical purposes.
Order pronounced in the open court on 11th March, 2026 at Chennai.