Once nexus between expenses incurred and purpose of business was established, interest expenditure cannot be disallowed

Facts of the case:

• Assessee was engaged in the business of educational activities and declared an income of Rs.2,11,15,617/-.
• In the course of the assessment proceedings, it was noticed that assessee had given interest free advances and loans to its sister concerns and claim interest expenses accordingly.
• The assessee was required to explain the allowability of interest expenses in view of above.
• In view of thereof, the assessee was required to explain why expenses on interest on loan be allowed as an expenditure when there is a diversion of funds to Planman Group of Companies by the assessee.
• Considering the reply of the assessee the AO concluded that the assessee has failed to prove commercial expediency for advancing these loans to its sister concern.
• Accordingly, the interest on borrowed capital to the extent of the same was held to be for non-business purposes and an addition by way of a disallowance was made.
• AO further observed that royalty to the extent on Rs.10,08,37,857/- was paid to M/s Planman Consulting India (P.) Ltd. and Rs.16.57 crore as advertisement expenses to M/s Planman Media (P.) Ltd.(both these companies were under the same management).
• Rejecting the same, the AO invoking section 40A(2) made a disallowance of 5% of the amount booked for want of commercial expediency and reasonableness of the payments thereby resulting in the additions of Rs.50,41,892/- and Rs. 82,85,000/- on account of 5% of royalty payment and 5% of advertisement expenses respectively.

Contention of the revenue:

• On one side assessee is paying the interest against mortgage of property amounting Rs.118 crore and simultaneously on the other side assessee have paid loan and advances to the sister concern companies in which the directors has substantial interest. Besides, assessee is paying interest on loan amounting to Rs.88,500,000.
• Excessive and unreasonable payment has been made to the associate concern and the AO is empowered to exercise his judgement in a reasonable and fair manner and the disallowance of 5% of the expenses claimed is a very reasonable disallowance.
• The assessee has not taken any loan from the bank but the fact remains that had the available funds been utilized for making payment towards the purchase of the specific land and building then the interest component of the payment would have been reduced.
  

Contention of the assessee:

• The payment to the sister concerns was for providing the job training and consultancy in running the assessee’s educational institutions more effectively and efficiently so that profit earning is enhanced. The payment it was stated was made for the said purpose in order to make the team more efficient and enable the assessee’s company to use their skills efficiently and prudently for education and allied purposes.
• Advertisement expenses has been made exclusively for business purposes of the assessee and is for inserting the advertisements in the dailies and at times in magazines also.
• The loans were advanced to the sister concern for business purpose was advanced from its own revenues generated in the year under consideration which was not disputed by revenue.
• Revenue is barred to make out a case that had the interest free advance not been made to the sister concern, the payment of interest to M/s Anant Raj Industries would have reduced. Reliance was placed upon SA Builders Ltd. vs CIT 288 ITR 1 (SC)(2006); ACIT vs Gillete Diversified Operation P. Ltd. & Others 2015 (4) TMI 49.
• The business premise was purchased from M/s Anant Raj Industries. Only part payment was made at the time of purchase and rest of the payment was mutually agreed to be paid in instalments.
  

Held by CIT (A):

• The CIT(A) upheld the action of the AO in making disallowance u/s 36(1)(iii) in respect of the interest liability and the addition on account of disallowance of royalty expenses and advertisement expenses were deleted after considering the explanation of the assessee.
  

Held by ITAT:

• No effort or any arguments have been advanced by the Revenue to justify that the expenses were unreasonable and excessive. In the absence of any justification for making a 5% disallowance of the total expenses for royalty, we find no good reason to vary the finding arrived at in the impugned order.
• The mere fact that the booking of advertisement expenses has been done through the associate concern instead of the assessee directly by itself does not create any ground for making a disallowance.
• The purchase of a specific property on instalment payment from which business of the assessee has been conducted is a matter of record. The business purpose of the purchase of the specific property is accepted by the AO as part of the payments towards M/s Anant Raj Industries and only proportionate disallowance is made on the ground that had the amounts not been advanced to the sister concern, the same would have reduced the interest component of the purchase price.