BABA SATYANARAYAN HIMGHAR P. LTD.,,HOOGHLY vs. DCIT, CIRCLE - 23, , HOOGHLY

This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-6, Kolkata dated 05.04.2019 and the solitary issue involved therein relates to the addition of Rs.8,06,314/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of disallowance out of interest.

there was no chance of recovery of higher interest from them because of their losses. However, it was also found having not charged such interest on such interest bearing funds, the appellant had to pay a substantial amount of interest on them, which in my opinion is because of extraneous reasons neither having any nexus with or bearing on the business of the appellant. In this respect, I concur with the conclusion of the AO that no prudent entrepreneur will advance the loan for fetching less interest than that paid by it on loans taken. In the instant case, the appellant pays more interest to the bank but gets less interest from the farmers. In other words, the appellant had made payment of interest from its own kitty whereas the capital was enjoyed by someone else. In fact, even after exercise of appreciable persuasion, the AR was unable to justify such business decision taken by the appellant for receiving lesser rate of interest from the farmers. Therefore, in my considered opinion, the deduction claimed u/s. 36(1)(iii) of the Act in the instant case cannot be acceded to in view of the fact that such disallowance made is based on a strong premise. Further, the decisions relied on by the appellant are not applicable to the facts of the instant case as the ratios laid down in those judgments are thoroughly distinguishable. In view of the aforesaid facts on the issue, the action of the AO in this respect is wholly in conformity with law and is also supported by strong logic and is accordingly upheld. Therefore, the ground nos. 1 & 2 of the appeal are, therefore, dismissed”.

Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal.

those farmers. So the AO has held that loan has not been exclusively used for the purpose of business and the Ld. CIT(A) has confirmed the view taken by the AO and disallowed the interest on proportionate basis. However, we observe that the amount of loan was given to the farmers for the purpose of business expediency of the assessee. We find that there is no bar against advancing of loan interest-free or at a low rate of interest under the Act. There may be many considerations, including business considerations, for not charging interest or charging interest at a low rate. Dispute between the Revenue and the assessee often arises when money is borrowed with interest and loan is advanced interest-free or at a low rate of interest. In such a case the tendency of the Assessing Officers generally is to disallow the interest paid on the money borrowed either in full or proportionately depending upon the quantum of loan advanced and interest, if any, charged. But whether the assessee charged interest on loan advanced or not is not at all a relevant consideration for determining allowability of interest paid under section 36(1 )(iii) of the Act. As already discussed, the relevant consideration is whether the moneys have been borrowed for the purposes of business or profession and whether interest paid. In the interest of maintaining good business relation, interest- free loans or loans at a low rate of interest may be given to others with whom the assessee has business relation or with whom he expects to establish business connection or with whom he has other business obligations, present or past. There may be many other reasons also both business or non-business. If interest-free loan or loan at a low rate of interest is given for business consideration out of the capital borrowed with interest then also the borrowing would be for the purposes of business, and interest paid on the borrowed capital would be allowable as deduction under section 36(1)(iii) of the Act. There is no compulsion that interest should always be charged on any lending, nor there is any requirement that income must be earned by utilizing the capital borrowed with interest so as to be entitled to the deduction under section 36(1 )(iii) of the Act. Merely for the reason that interest was not charged or charged at a low rate on the lending, the interest paid for borrowing cannot be disallowed. It is a matter of business prudence and entirely upto the assessee as to how he utilizes the fund in the interest of his business. The basic requirement is that the borrowed capital should be used for the purposes of business or profession. An argument may be advanced that if interest-free loan had not been given then the assessee could have reduced his debt and consequently the interest payment. In this respect the observation of the Tribunal in the case of Coimbatore Salem Transport (P) Ltd., affirmed by the Madras High Court in CIT vs. Coimbatore Salem Transport (P) Ltd. (1966) 61 ITR 480 (Mad), was as under: "The worst that can be said is that if such advances had not been given, the assessee could have reduced Assessment Year: 2013-2014 Baba Satyanarayan Himghar Pvt. Limited its indebtedness and thereby its interest charges. But that would be venturing into realms that are not open to the Department. It is a matter of business prudence. "

The Madhya Pradesh High Court in the case of D&H Secheron Electrodes (P) Ltd. vs. CIT (1984) 40 CTR (MP) 366 : (1984) 149 ITR 400 (MP) held that where the assessee borrowed capital for business purposes, no portion of the interest could be disallowed even if the assessee had dissipated the funds by giving interest-free loans. Similarly, the Madras High Court held in the case of CIT vs. Pudukkottai Co. (P) Ltd. (1972) 84 ITR 788 (Mad) that, in view of the finding that the amounts borrowed were for the purpose of business, no disallowance of interest paid could be made if the assessee borrowed the funds at a higher rate of interest and lent it at a lower rate”.

So it is evident from the aforesaid discussion that there is an element of business expediency involved in this transaction so as the amount of interest charged by assessee from the farmers at a lesser rate.

From the above cited judgments, we find that interest paid to the bank at a higher rate and charged from other parties at a lesser rate on account of business expediency is allowed. On this basis and taking a consistent view we allow the claim of assessee for receiving lesser rate of interest from the farmers, hence, this ground of assessee's appeal is allowed”.

(2) Deputy Commissioner of Income Tax, Circle-23, Hooghly, Aayakar Bhawan, G.T. Road, Khadina More, P.O. & P.S. Chinsurah, Hooghly-712101