ITAT deleted addition as loans were advancedout of commercial expediency

1 The assessee firm was engaged in the business of Kacha Arhtia/Commission Agent, deriving income from Dami, which is charged @ 2.5% on the total sales of food grain items sold through it. The AO made an addition of Rs.3,91,560/- on account of disallowance of interest u/s 36(1)(iii) (of Income Tax Act, 1961), as the assessee firm was alleged to have advanced interest free loans and advances out of borrowed funds.

2 CIT(A) restricted the addition to Rs.1,14,123/- holding that the assessee firm was not justified in charging interest only @ 8% from the agriculturists, as it had paid interest @ 12% on unsecured loans/advances taken by it.

3 On appeal, the ITAT held as under:

In "Shivganga Builders (P.) Ltd. vs. ACIT". 123 ITD 105 (Ahd.), it was held that the interest on the borrowed funds paid by an assessee is an allowable expenditure when borrowed fund is utilized for the purpose of the business of the assessee and the department is not empowered to decide when assessee is to borrow and when it should not borrow, as these are matters which are required to be decided by the assessee as a businessman; that the assessee may make an imprudent business decision, but the same itself does not empower the revenue to disallow a legitimate and bona fide expenditure. It is pertinent to note that in this decision, the matter was remitted to the file of the AO for decision afresh, since the necessary facts to decide the issue were not available on record. In the case at hand, however, all the facts are on record. To reiterate , the ld. CIT(A) has not disputed that the loans were advanced by the assessee firm to the agriculturists as a matter of commercial expediency, since the agricultural produce is a pre-requisite condition of the assessee's business.

4. In view of the above, the grievance of the assessee is found to be justified and as such, it is

accepted. The order of the ld. CIT(A) is reversed. The addition is deleted.”

Case Reference-M/s. Tirath Ram Ram Nath, vs. Income Tax Officer

IN THE INCOME TAX APPELLATE TRIBUNAL,

AMRITSAR BENCH; AMRITSAR (SMC)

BEFORE SH. A.D. JAIN, JUDICIAL MEMBER

ITA No.682(Asr)/2014

Assessment year:2007-08

PAN:AABFT4609H