Assessee is free to extend credit facility to any concern; AO cannot compel them for conducting the Business: ITAT Ahmedabad [Read Order]

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The Ahmedabad bench of the Income Tax Appellate Tribunal, in recent ruling opined that the assessee is free to choose the concerns to which it wants to extend the credit facility. The Assessing Officer cannot make suggestions in such matters.

The Tribunal further observed that if the Officer thinks that the assessee has claimed deduction in respect of amount spent by it on interest bearing funds for non-business purpose, the disallowance is justified.

The Assessing Officer passed an assessment order against the assessee under section 143(3) r.w.s. 153A of the Income Tax Act as per which, the officer disallowed interest expenditure on assessees’ two major debtors alleging that the assessee had unnecessarily incurred interest expenditure on these debts which has been given for without any business purpose.

On appeal, the Commissioner of Income Tax (Appeals) dismissed the plea of the assessee and sustained the assessment order. Being aggrieved, the assessee preferred an appeal before the Appellate Tribunal.

The Tribunal noticed that the Supreme Court in Hero Cycles P.Ltd. Vs. CIT, in which the Apex Court observed that, that if the assessee has used funds for the purpose of business, even for the business of sister concern, then, the interest expenditure cannot be disallowed.The Tribunal further noted that the Apex Court, in the above decision, by referring the decision f the Delhi High Court in CIT Vs. Dalmia Cement P.Ltd, observed that businessman cannot be compelled to maximize its profit, and income tax authorities cannot steps into the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.

While allowing the deduction to the assessee, by following the above decision, the Tribunal observed that, “In the present case, the ld.AO, for making disallowance, as made an observation that if M/s.Uday Yarn Twister P.Ltd. was in financial crunch, then that company should have taken loan. To my mind, it is the assessee who has to carry out its business. It is for the assessee to decide to which concern, it can extend credit facility. The ld.AO cannot thrust upon his point of view for conducting the business. If the assessee as simplicitor, siphoned off the interest bearing funds for non-business purpose, then, the AO might be justified, but if certain payments are not being received by the assessee during the course of business or some investment was made keeping in mind future business interest, then the AO can disallow the interest expenditure. Respectfully following the decision of the Hon’ble Supreme Court, I allow this ground of appeal and delete the disallowance.”

Read the full text of the order below.