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2015 (6) TMI 966 - AT - Income TaxDisallowance of interest calculated on advances given to sister concern - CIT(A) deleted the addition - Held that - The assessee has total capital and reserves available at ₹ 140 crores along with the total income assessed by the Assessing Officer for the assessment years 2006-07 and 2007-08 at ₹ 26.86 crores and ₹ 43.47 crores respectively, the assessee has availability of funds interest-free more than the interest-free advances. Accordingly, we confirm the order of the Commissioner of Income-tax (Appeals) deleting the disallowance. - Decided in favour of assessee
Issues Involved
1. Disallowance of interest on advances given to sister concern Neora Hydro Ltd. (NHL). Detailed Analysis Issue: Disallowance of Interest on Advances to NHL Background: The Revenue appealed against the orders of the Commissioner of Income-tax (Appeals)-VI, Kolkata, which deleted the disallowance of interest calculated on advances given to NHL. The assessments were framed by the Deputy Commissioner of Income-tax, Circle-6, Kolkata under section 143(3)/115WE(3) of the Income-tax Act, 1961 for the assessment years 2006-07 and 2007-08. Revenue's Argument: The Revenue contended that the Commissioner of Income-tax (Appeals) erred in deleting the disallowance of interest of Rs. 86,87,054, which was calculated and taxed on advances given to NHL. The Assessing Officer (AO) argued that: - NHL was a joint venture of the assessee, and advances were given without charging interest on commercial expediency. - The assessee paid advances out of borrowings from a cash credit account and paid interest on these borrowings. - The interest paid on borrowings should be capitalized as per the proviso to section 36(1)(iii) of the Income-tax Act. - The assessee failed to prove that the amount was borrowed and used for its own business. Assessee's Argument: The assessee argued that: - NHL was a concern where the assessee held 50% shares initially, and by March 31, 2005, the remaining 50% shares were transferred to the associated concerns of the assessee. - The advances were made from a composite cash credit account where profits were also deposited. - The advances were given on commercial expediency, as NHL was to supply electricity to the assessee under an agreement. - The assessee had sufficient funds of its own to advance the money to NHL. Commissioner of Income-tax (Appeals) Observations: The Commissioner of Income-tax (Appeals) deleted the disallowance, observing that: - The assessee had sufficient funds of its own to advance money to NHL. - The advances were made on commercial expediency, as there was a business interest in the supply of electricity from NHL. - The case law cited by the assessee, including the judgments of the Calcutta High Court in CIT v. Britannia Industries Ltd. and J. K. Industries Ltd. v. CIT, supported the assessee's position that interest-free advances could be given to a sister concern if there were sufficient funds and commercial expediency. Tribunal's Decision: The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), noting that: - The assessee had sufficient funds of its own to advance the loan to NHL. - The advances were made from a mixed account, which included sale proceeds and profits. - The assessee had a 50% shareholding in NHL, and there was an agreement for the supply of electricity, indicating commercial expediency. - The judgments in CIT v. Britannia Industries Ltd. and J. K. Industries Ltd. v. CIT supported the assessee's case. - The presumption should be that interest-free advances are given out of interest-free funds available to the assessee, as held by the Bombay High Court in CIT v. Reliance Utilities and Power Ltd. Conclusion: The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of interest for both the assessment years 2006-07 and 2007-08, dismissing the Revenue's appeals. Final Order: Both appeals of the Revenue were dismissed, and the order was pronounced in the open court on June 9, 2015.
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