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Facts
The assessee filed two appeals against the order of the CIT(A) which upheld the disallowance of interest on unsecured loans. The Assessing Officer disallowed interest paid at rates higher than interest received, treating it as excessive.
Held
The Tribunal held that the allowability of interest under Section 36(1)(iii) depends on the purpose of the loan and not the comparative interest rates, provided the loan is for business purposes and genuine. Relying on the Supreme Court's decision in SA Builders Ltd. v. CIT, the Tribunal reversed the CIT(A)'s order.
Key Issues
Whether interest paid on unsecured loans can be disallowed merely because the rate is higher than the interest received, when the loan is utilized for business purposes.
Sections Cited
36(1)(iii), 147, 148, 143(3)
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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI JAGADISH
आदेश / O R D E R
PER JAGADISH, A.M : Aforesaid two appeals filed by the assessee for Assessment Years (AYs) 2018-19 & 2020-21 arises out of the orders of Learned Commissioner of Income Tax (NFAC), Delhi [hereinafter “CIT(A)”] dated 17.01.2025.
The facts in both the appeals of the assessee are identical and issues are common hence, we proceed to pass a common order. For & 898/Chny/2025 Abhishek Mehta :- 2 -:
1. brevity, we shall take up the appeal in for A.Y 2018-19 as lead case. The grounds of appeal raised by the assessee for A.Y 2018-19 are as under:
“1. The order of the National Faceless Appeal Centre (NFAC), is wrong, illegal and is opposed to law and facts of the case.
2. 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.
3. 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.
4. 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.
7. 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.
& 898/Chny/2025 Abhishek Mehta :- 3 -:
For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon'ble Tribunal may be pleased to allow the appellants appeal and thus render justice.”
3. 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 & 898/Chny/2025 Abhishek Mehta :- 4 -: similar arrangement has been made in earlier years also and no disallowance has been made. In support of this, the Ld. AR has relied on the decision of Hon’ble Supreme Court in the case of SA Builders Ltd. v. CIT [2007] 288 ITR 1 (SC) that the concept of commercial expediency must been seen from the point of view of the businessman and not of the tax authority.
The Ld. Departmental Representative (DR), has relied on the orders of lower authorities.
5. 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, & 898/Chny/2025 Abhishek Mehta :- 5 -: the assessee would ordinarily be entitled to deduction of interest on its borrowed loans. The Ld. CIT(A) has not appreciated the fact that loan advanced was to the business concerns of assessee and the case law of Hon’ble Supreme Court in the case of S A builders Ltd., supra, is squarely applicable. In view of above, we reverse the order of Ld CIT(A) and delete the disallowances of interest made by the A.O. The appeal filed by the assessee is accordingly allowed.
A.Y 2020-21: 6. We find that the identical issue is involved in assessee’s appeals for A.Y 2018-19 also and accordingly, our adjudication above in A.Y 2018-19 is mutatis mutandis applies therein also. Therefore, for the similar reasons, we allow this appeal as well.
In the result, both the appeals filed by the assessee are allowed.
Order pronounced on 21st day of August, 2025 at Chennai.