Can financial charges be allowed as business expenditure even though there was no business expediency?

The Income Tax Appellate Tribunal considered whether financial charges could be allowed as business expenditure even if there was no clear business expediency. The tribunal noted that the assessee was unable to quantify the exact amount of borrowed funds used for non-business purposes. This ruling addresses the complexities of attributing expenditure to business activities when funds are mixed.

IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES “A”: HYDERABAD
(THROUGH VIRTUAL CONFERENCE)
BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA Nos. 1745/H/2016 and 1120, 1121 & 1663/H/2017
AY.: 2010-11, 2011-12, 2013-14 & 2014-15

Dy. Commissioner of Income-tax, Circle – 2(1),
Hyderabad.

vs

KSK Energy Company Pvt. Ltd., Hyderabad.
PAN – AACCK9414B

Revenue by:
Smt. Nivedita Biswas
Assessee by:
Shri S. Rama Rao
Date of hearing:
24/02/2021
Date of pronouncement:
30/08/2021
O R D E R

We notice at the outset that Revenue’s instant appeals in ITA No. 1745/Hyd/2016 suffers from 235 days delay, ITA No. 1120 & 1121/Hyd/2017 suffer from 23 days delay respectively in filing. To this effect, the ld. DR filed an affidavit, wherein, inter-alia, averred that due to late receipt of the authorization letter from the Office of the Pr. CIT – 2, Hyderabad was caused the impugned delay in filing of the instant appeals.

2. Consultancy and undertakes a variety of development activities including undertaking necessary feasibility studies, fuel assessment, tie-up and monitoring, logistic support and various services required by the power plants and in turn enjoys development fees in line with actual power generation supported and achieved. A lead lag could exist between incurrence of expenditure, providing the necessary service and revenue realisation against such services.

3. In the re-joinder, the ld. DR submitted that the case law relied by the AR is not applicable to the case of the assessee because the facts are different in those case laws. He therefore, contended that the disallowances deleted by the CIT(A) without examining the cases in depth with case law relied by the AR of the assessee with the present facts in the impugned assessment years is unjustified and he requested that matter may be sent back to AO for further depth examination.

4. Considering the arguments from both the sides, we observe from the financial statements of the assessee that it has given loans and advances and invested in shares of the related parties and to others from its own funds as well as from the borrowed funds. From the entire arguments of the ld. AR of the assessee, we find that it was unable to quantify the amount of borrowed funds which have been utilized for other than the business purposes of the assessee.

5. decided after a period of 90 days from the date of hearing as per Rule 34(5) of the IT(AT) Rules 1963, the same however, does not apply in the covid lockdown situation as per hon'ble apex court's recent directions dated 27-04-2021 in M.A.No.665/2021 in SM(W)C No.3/2020 'In Re Cognizance for extension of limitation' making it clear that in such cases where the limitation period (including that prescribed for institution as well as termination) shall stand excluded from 14th of March, 2021 till further orders.
6. Pronounced in the open court on 30th August, 2021.

Please find attached the enclosed file for the full judgement