By TIOL News Service

MUMBAI, SEPT 25, 2014: THE issue before the Bench is - Whether interest paid to sister concern can be disallowed on the ground that the assessee has not paid interest to any other parties from whom it had taken advances and further the said interest was not reflected in the Tax Audit report u/s. 44AB. NO is the answer.

Facts of the case

The assessee is a reality developer. The assessee has paid interest of Rs.63,45,627 to its sister concern being specified person u/s. 40A(2)(b). Interest was paid @ 12% per annum. The assessee has not paid interest on similar advances. The assessee was having unsecured loans of Rs.7,66,79,452/- on which also the assessee has not paid any interest. The assessee has made interest free advances to various parties amounting to Rs.17,55,87,523/-.The AO who was of the opinion that the assessee has not paid interest to any parties from whom he has taken advances and further the said interest was not reflected in the Tax Audit report u/s. 44AB. The AO accordingly disallowed interest of Rs.63,45,627/- paid to sister concern being specified person u/s. 40A(2)(b) .The CIT(A) was of the opinion that the interest paid by the assessee to its sister concern was not in the nature of an expenditure incurred in respect of some offence or which is prohibited by law. Therefore, Explanation to Sec. 37(1) does not apply. The CIT(A) further observed that non-mentioning of the payment in Tax Audit Report u/s. 44AB cannot by itself allow the AO to make the addition. The CIT(A) observed that the comparison by the AO of not paying interest on other advances is uncalled for.

The AO found that the assessee has not deducted TDS on the payment made in respect to Development expenses. Invoking provisions of Sec.40(a)(ia), the AO disallowed the sum of Rs.71,90,199/-. The CIT(A) observed that once the labour charges have been incurred by the purchaser party and TDS was duly deducted by that party out of such labour payment, the assessee was not required to deduct tax at the time of reimbursing such payment to the purchaser party and deleted the addition.

Having heard the parties, the Tribunal held that,

++ the reasons given by the AO for disallowing the interest are not tenable in law. The assessee has been paying interest since 1999-2000 by making TDS as per provisions of law. The said interest has been allowed in all the preceding A.Y. The recipient is declaring the interest income in its return of income. The CIT(A) has very rightly declined to invoke Explanation to Sec. 37(1) in respect of this payment of interest. No interference is called for with the findings of the CIT(A);

++ on the issue of payment made in respect to Development expenses, it is an undisputed fact that the assessee has simply reimbursed the expenditure incurred, on such reimbursement of expenditure, there is no liability for TDS;

++ on the issue of payments received as advances from sister concern, the assessee is directed to furnish the share holding pattern in the related companies during the year under consideration. The AO is directed to verify whether the assessee is a share holder of M/s. Gazebo Industries Ltd. or whether the assessee has any substantial interest in any concern which has a substantial interest in M/s. Gazebo Industries Ltd. and decide this issue afresh as per provisions of law.

(See 2014-TIOL-676-ITAT-MUM)