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Facts
The assessee, engaged in consultancy services, obtained loans from group companies at 15% interest and utilized these funds for business purposes, including advancing loans to subsidiary companies at 15-16% interest. The Assessing Officer disallowed interest under section 36(1)(iii) for A.Y. 2013-14 and 2014-15, citing that the 15% interest paid to group companies was higher than the 12-12.5% rate available from banks.
Held
The tribunal held that the disallowance was not justified as the primary condition for deduction under section 36(1)(iii) is that the loan is for business purposes, which the AO had accepted. The interest rate differential alone was not a sufficient ground for disallowance, especially since the TPO had not proposed any variation for international/specified domestic transactions and similar interest payments were accepted in prior assessment years.
Key Issues
Whether interest paid on loans obtained from related parties at a higher rate than bank loans can be disallowed under section 36(1)(iii) when the loan is demonstrably utilized for business purposes and accepted by the AO.
Sections Cited
36(1)(iii), 92CA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI ‘C’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI KUL BHARAT
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
The above captioned two separate appeals by the assessee are preferred against two separate orders of the CIT(A) - 35, New Delhi dated 27.02.2018 and CITA – 22, New Delhi dated 26.03.2018 pertaining to A.Ys 2013-14 and 2014-15 respectively.
Since both the appeals pertaining to same assessee were heard together and common grievance is involved, they are disposed of by this common order for the sake of convenience and brevity.
The common grievance relates to the disallowance of interest u/s 36(1)(iii) of the Income-tax Act, 1961 [the Act, for short] though the quantum may differ. In A.Y 2013-14 disallowance of Rs. 6,48,70,479/- was confirmed and in A.Y 2014-15, the same is Rs. 3,18,09,558/-.
Briefly stated, the facts of the case are that the assessee is engaged in providing consultancy services and earned interest and some other miscellaneous income. During the course of scrutiny assessment proceedings for A.Y 2013-14, the assessee was asked to submit complete details of loans taken and interest debited to the profit and loss account alongwith business exigency and purpose. The assessee was also asked to explain the business purpose for advancing huge amount of loans and advances to sister concern and further explain how the loans and advances taken during the year have been utilized for business purpose.
The assessee filed detailed reply explaining that total loan received during the year was Rs. 983.70 crores on which interest of Rs. 42.14 crores has been paid. It was explained that all the loans have been used for the purpose of business in the form of investment in debentures and by way of giving loan to subsidiary companies on which the assessee earned interest income of Rs. 26.20 crores.
Reply of the assessee was duly considered by the Assessing Officer who found that the assessee has been earning interest in the range of 7% to 16% and on the loans given to associates/subsidiary companies, interest has been earned in the range of 15% to 16%. The Assessing Officer further found that the assessee has obtained loans from banks and certain other financial institutions @ 12-12.5% whereas the assessee has obtained loans from group companies @ 15%.
The Assessing Officer, accordingly, disallowed incremental interest u/s 36(1)(iii) of the Act and computed disallowance of Rs. 6,48,70,479/- in A.Y 2013-14 and Rs. 3,18,09,558/- in A.Y 2014-15.
The assessee challenged the additions before the ld. CIT(A) but without any success.
Before us, the ld. counsel for the assessee vehemently contended that the Assessing Officer has accepted that loan taken by the assessee has been utilized for the purpose of business and no doubt has been raised towards the genuineness of the loan obtained and interest paid.
Therefore, in our considered opinion, the assessee has successfully discharged the onus cast upon it by provisions of section 36(1)(iii) of the Act.
It would be pertinent to mention here that during the assessment proceedings for A.Y 2013-14, the matter was referred to the TPO for determination of ALP of the international transactions and specified domestic transactions and the TPO did not propose any variation vide order dated 26.09.2016 framed u/s 92CA of the Act.
Interest has been disallowed only on the basis that rate of interest paid on loans obtained from related parties which is 15% was higher than the rate of interest paid to banks @ 12.5%. In our considered opinion, the only requirement for claiming deduction u/s 36(1)(iii) of the Act is that the loan is borrowed for the purpose of business of the assessee and interest is paid thereon.
The contention of the ld. DR that the assessee ultimately wrote off the loans given to its associate concern because of the order of NCLT, Mumbai Bench is of no substance as the Assessing Officer has not raised this issue in the assessment order and the Revenue is not in appeal before us.
Moreover, we find that the assessee has been paying interest to related entities for the last many years and the said interest payments have never been disputed by tax authorities in the past and rate of interest has been accepted while passing the assessment order for A.Ys 2011-12 and 2012-13.
Considering the facts of the case in totality, we do not find any merit in the impugned disallowances made by the Assessing Officer.
Therefore, the Assessing Officer is directed to delete the disallowances from both the A.Ys under consideration.
In the result, both the appeals of the assessee in ITA Nos.
2899/DEL/2018 and are allowed.
The order is pronounced in the open court on 09.02.2024.