2014 (12) TMI 1191 - HC - Income Tax

Disallowance of interest as interest free advances were given to its sister concerns - ITAT deleted the addition - Held that - , the assessee admittedly had its own funds, as referred to earlier, and admittedly such funds/reserves being substantially higher than, even otherwise, the advances to the debtors, no notional interest or hypothetical interest could have been disallowed on such facts. The revenue has failed to prove nexus. In our view, the ITAT has correctly appreciated the facts and law in deleting the notional interest, disallowed by the AO and accordingly the appeal is decided against the revenue and in favour of the assessee.

Summary

Issues:
Challenge to disallowance of interest on interest-free advances to sister concerns.

Analysis:
The High Court of Rajasthan heard an Income Tax Appeal against the order of the Income Tax Appellate Tribunal (ITAT) regarding the disallowance of interest on interest-free advances to sister concerns. The appellant-revenue contended that the assessee diverted money to sister concerns without charging interest or at lower rates, leading to disallowance of a specific amount by the Assessing Officer (AO). The Commissioner of Income Tax (Appeals) upheld this disallowance. However, the ITAT, after reviewing the evidence, found that the assessee had sufficient funds and there was no proven nexus between borrowed funds and the interest-free advances. The ITAT deleted the disallowed amount.

The respondent-assessee argued that having its own funds allowed it the discretion to manage its affairs. Citing various judgments, the respondent contended that once an assessee has its own capital, it can decide how to utilize it. The High Court noted that the assessee had substantial funds in addition to the amount paid as interest, and the interest paid was lower than the available capital. The Court emphasized that advancing money at lower rates or interest-free to sister concerns does not automatically imply diversion of interest-bearing loans.

Referring to the case law, the Court highlighted the concept of commercial expediency in business expenditures. It pointed out that the Revenue cannot dictate how a businessman should maximize profits. The Court also mentioned judgments where the Tribunal allowed deductions for loans advanced for business purposes. It cited instances where Courts upheld deductions when funds were available and loans were made for business reasons.

Based on the evidence and legal principles, the High Court concluded that the ITAT correctly deleted the disallowed interest amount. It emphasized that the revenue failed to establish a nexus between borrowed funds and interest-free advances. Therefore, the appeal was decided in favor of the assessee, and the disallowance of notional interest was upheld.