ITAT Kolkata Upholds Interest Deduction On Loans Advanced On Commercial Expediency Grounds

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) on 18 May upheld the deletion of disallowance of interest expenditure claimed by South City Projects (Kolkata) Ltd., holding that loans advanced to its subsidiary for overseas real estate projects were made on grounds of commercial expediency and qualified for deduction under the Income Tax Act.

Accountant Member Rajesh Kumar and Judicial Member Pradip Kumar Choubey dismissed the Revenue's appeals for Assessment Years 2021-22 and 2022-23 against an order passed by the Commissioner of Income Tax (Appeals). The Bench observed:

“The loans were advanced to AAIPL for business purposes and therefore, even if these loans did not yield any interest income, yet the interest paid on borrowings was an admissible deduction u/s 36(1)(iii) of the Act.”

The taxpayer had advanced funds to its subsidiary, AA Infraproperties Pvt. Ltd., for real estate projects in Sri Lanka and Dubai. Though the taxpayer initially charged interest on the loans, it later stopped charging interest due to financial stress, project delays and Covid-19 related disruptions.

The Revenue argued that once the loans became interest-free, the corresponding interest expenditure on borrowed funds could not be allowed as deduction.

The Tribunal, however, relied on its earlier order for AY 2020-21 and the Supreme Court's ruling in Sharp Business System v. CIT, which the taxpayer cited on the issue of commercial expediency. It also upheld reduction of the corporate guarantee commission from 0.5% to 0.25%, holding that the guarantee exposure was jointly shared by the taxpayer and its subsidiary.

Accordingly, the ITAT dismissed the appeals.