Relief for Hero Cycles: ITAT Quashes Disallowance of ₹31 crore [Read Order]
The Tribunal held that commercial expediency was established in the case of subsidiary advances.
Hero Cycles - ITAT - Quashes - TAXSCAN
Hero Cycles - ITAT - Quashes - TAXSCAN
The Income Tax Appellate Tribunal (ITAT), Chandigarh, Bench considered the appeal of Hero Cycles concerning the Assessing Officer’s (AO) order of disallowance of interest expenditure amounting to Rs. 8,39,55,267 and Rs. 22,86,36,462/- suo moto, ruling that both shall be deleted.
The Assessee, M/s Hero Cycles Ltd., filed its return of income for Assessment Year (AY) 2012-13. The company had advanced funds to group entities, namely Munjal Hospitality Pvt. Ltd. and Hero Exports Pvt. Ltd., while simultaneously claiming large interest expenses on its borrowings.
The AO examined the balance sheet and observed debit balances in the accounts of these concerns, treating them as interest-free advances given out of borrowed funds and unrelated to business purposes. On this basis, the AO invoked Section 36(1)(iii) of the Income Tax Act, 1961 and disallowed interest expenditure of ₹8,39,55,267.
Additionally, the assessee had itself offered a suo moto disallowance of ₹22,86,36,462 in its return, contending later that it was wrongly included.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s order by confirming the disallowance of ₹8,39,55,267, but didn’t interfere with the ₹22,86,36,462 suo moto disallowance. This led to an appeal before the ITAT.
The Assessee, represented by Ashwani Kumar, Ashish Aggarwal, and Deepali Aggarwal, argued that the advances were out of commercial expediency and backed by sufficient own funds. With respect to the advance to Munjal Hospitality Pvt. Ltd., it was submitted that since the concern was a subsidiary company, the advance was in the larger interest of business and covered by the principle laid down in S.A. Builders Ltd. v. CIT (2007).
Regarding the advance to Hero Exports Pvt. Ltd., the assessee argued that it was a longstanding advance consistently accepted in earlier assessments without any disallowance, and therefore the AO could not take a different view in the present year absent any change in facts.
At last, on the issue of the ₹22,86,36,462 suo moto disallowance, the assessee submitted that the disallowance was erroneously offered in its return of income, and tax must be assessed on correct legal principles and not on mistaken concessions by the assessee.
The Revenue, represented by Manav Bansal, defended the disallowances, arguing that the advances to group entities were unrelated to business purposes and hence attracted disallowance under Section 36(1)(iii) of the Income tax Act, 1961.
The Bench comprising of Vice President, Rajpal Yadav and Accountant Member, Krinwant Sahay held that the case was squarely covered by the judgment of the Supreme Court in Hero Cycles (supra). The Tribunal emphasized that once the Hon’ble Supreme Court had already recognized that advances to group concerns for commercial expediency cannot be disallowed under Section 36(1)(iii), thus there was no justification in sustaining the disallowance.
Accordingly, it directed the Assessing Officer to delete the disallowance of interest amounting to ₹8,39,55,267 made in respect of loans advanced to Munjal Hospitality Pvt. Ltd. and Hero Exports Pvt. Ltd.
On the issue of the ₹22.86 crore suo moto disallowance, the Tribunal held that as the disallowance had been mistakenly offered in the return, it too deserved to be deleted in light of the principle that tax liability must be computed in accordance with law and not on the basis of erroneous concessions by the assessee.
Therefore, the ITAT allowed the assessee’s appeal.
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