ABHISHEK MEHTA,CHENNAI vs. ITO, CORPORATE CIRCLE-3(1), CHENNAI

The National Faceless Appeal Centre erred in upholding the interest disallowance made by the AO under section 36(1) (iii) of the Income Tax Act, 1961, on the ground that the rate of interest paid on unsecured loans was higher than the interest received.

The National Faceless Appeal Centre ought to have seen that the said disallowance of interest is arbitrary and contrary to the settled legal position that the business necessity and commercial expediency of the expenditure must be determined from the viewpoint of the assessee, not the Revenue.

The National Faceless Appeal Centre ought to have seen Section 36(1) (iii) allows a deduction for interest on borrowed capital used for business purposes without specifying any benchmark for the interest rate. The tax authorities cannot arbitrarily determine what should be the ideal interest rate in a business transaction unless there is evidence of an arrangement designed to evade taxes.

The National Faceless Appeal Centre ought to have seen that it is a settled law as held by the Hon'ble Supreme Court in SA Builders Ltd. V. CIT (2007) 288 ITR 1 (SC) held that the concept of commercial expediency must be seen from the perspective of the businessman and not the tax authorities and that If the loan were taken for business purposes, the interest expense must be allowed.

The National Faceless Appeal Centre ought to have seen that once a loan transaction is found to be genuine and used for business, interest paid thereon cannot be disallowed merely because the rate appears excessive in comparison to other borrowings.

The National Faceless Appeal Centre ought to have seen the determining factor for allowability under Section 36(1)(iii) is the purpose of the loan and not the comparative interest rates. The revenue authorities having observed that the unsecured loan was taken and utilized solely for business purpose sought to have allowed the interest claimed by the appellant in toto.

The effective ground of appeal is against disallowing the interest u/s. 36(1)(iii) of the Act, paid at higher rate in comparison to the interest received. The A.O in the assessment order has observed that the assessee has paid interest of Rs.1,70,87,880/- at the interest rate between 12% to 22% as against the interest received of Rs.1,63,05,584/- at the interest rate from 12% to 15%. The A.O therefore disallowed the interest paid exceeding to 15% making disallowance of Rs. 9,06,589/- u/s. 36(1)(iii) of the Act. Aggrieved by the same, the assessee preferred an appeal before the Ld. CIT(A). However, the Ld. CIT(A) has confirmed the addition.

The Ld. Authorized Representative (A.R) of the assessee has argued that the assessee has been carried out enterprises in different entities as partnership firm, LLP and private limited companies and has taken loan to meet the business need of his enterprises. The Ld. AR further submitted that all the loan has been given to its business enterprise at the interest rate between 12% to 15% as it passed through without any profit motive. The Ld. AR has submitted that the ITA Nos.897 & 898/Chny/2025 Abhishek Mehta

The Ld. Departmental Representative (DR), has relied on the orders of lower authorities.

We have heard the rival submissions, and perused the materials available on record. The assessee has borrowed fund @12% to 21% and advanced to its business enterprises @ 12% to 15%. The A.O has disallowed the interest paid @ 15% treating them excessive. The assessee has advanced loan to its business concerns in which he is one of the key management person, partner or having beneficiary interest. The Hon’ble Supreme Court in the case of SA Builders vs. CIT, supra, has held that where it is obvious that a holding company has a peak interest in business subsidiary and hence, if the holding company advanced borrowed money to a subsidiary company and the same is used by the subsidiary company for some business purposes,

In the result, both the appeals filed by the assessee are allowed.