2011 (2) TMI 1419 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest on interest-free advances to sister concerns.
2. Disallowance of interest on investments in shares.
3. Disallowance of deferred tax liability and wealth tax provision while computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance of Interest on Interest-Free Advances to Sister Concerns:
The Assessing Officer (AO) disallowed Rs. 10,91,194/- of interest expenses on the grounds that the interest-free advances to sister concerns were made from borrowed funds on which interest was paid. The AO argued that under Section 36(1)(iii) of the Income Tax Act, 1961, interest on borrowed funds is deductible only if the funds are used for business purposes. The disallowance was based on the proportionate interest expenses attributable to these advances.

The CIT(A) deleted this disallowance, noting that similar disallowances in previous assessment years had been overturned by both the CIT(A) and the ITAT. The Tribunal upheld the CIT(A)'s decision, confirming that the assessee had sufficient interest-free funds to cover the advances, and thus, no disallowance was warranted.

2. Disallowance of Interest on Investments in Shares:
The AO disallowed Rs. 84,82,979/- of interest expenses, asserting that the borrowed funds were used for investments in shares, which was not the business of the assessee. The AO allowed the interest as a deduction under Section 57(iii) instead of Section 36(1)(iii).

The CIT(A) upheld the disallowance in principle but reduced it to Rs. 21,79,536/- after verifying that the investments made in earlier years were from interest-free funds. The CIT(A) found that the interest-free funds available during the year were not significantly higher than the investments, thus partially sustaining the AO's disallowance.

The Tribunal, however, disagreed with the CIT(A) and fully allowed the assessee's appeal. It noted that the assessee had sufficient interest-free funds to cover the investments, following the precedent set by the ITAT in earlier years and the Bombay High Court's ruling in Reliance Utilities & Power Ltd., which established that if sufficient interest-free funds are available, it is presumed that investments are made from these funds.

3. Disallowance of Deferred Tax Liability and Wealth Tax Provision while Computing Book Profit under Section 115JB:
The assessee raised an additional ground concerning the AO's disallowance of deferred tax liability of Rs. 2,51,74,574/- and wealth tax provision of Rs. 28,282/- while computing book profit under Section 115JB. The assessee argued that deferred tax liability must be provided as per Accounting Standard 22, and adjustments for wealth tax are not permitted under Section 115JB.

This ground was not pressed by the assessee during the hearing, and thus, it was dismissed as not pressed.

Separate Judgments:
For assessment years 2004-05 to 2006-07, the facts and circumstances were similar. The CIT(A) had sustained partial disallowances of interest expenses, but the Tribunal allowed the assessee's appeals, deleting the disallowances based on the consistent availability of sufficient interest-free funds.

Conclusion:
The appeals by the revenue were dismissed, and the appeals by the assessee were allowed, except for the partial allowance for the assessment year 2003-04. The Tribunal consistently followed the principle that sufficient interest-free funds negate the need for disallowance of interest on borrowed funds used for investments or advances.