2015 (8) TMI 1290 - AT - Income Tax

Addition on account of interest free advance given to sister concern - Held that - It is evident that in assessment year 2006-07, the issue of disallowance of interest u/s 36(i)(iii) of the Act, on interest free advances made to sister concerns was examined by the Assessing Officer and it was held by the Assessing Officer that the interest free advances were made out of interest free funds to the extent available. It was only the excess advances, which were held to be made out of interest bearing funds and the provisions of section 36(i)(iii) of the Act were applied thereon. In the impugned assessment year, on the very same advances, the Revenue seems to be taking a different view, by holding that the entire interest free advances are out of interest bearing funds. There has to be consistency and definiteness in the approach of the Revenue in recognizing the nature of an account so that the basis of a concluded assessment would not be ignored. Having held the interest free advances to be out of interest free funds in assessment year 2006-07, the Revenue cannot now take a totally different view and hold the same advances to be out of interest bearing funds in the impugned year. Even on merits it is clear from the facts stated above, that the assessee had enough interest free funds to advance interest free sums to its sister concern. - Decided against revenue

Summary

Issues:
Allowance of interest on interest-free advance to sister concern.

Analysis:
The case involves an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the allowance of interest on an interest-free advance given to a sister concern. The Revenue contended that the Commissioner erred in deleting the addition made on account of the interest-free advance, citing a judgment of the Punjab & Haryana High Court. The key issue revolves around the commercial expediency of the interest-free advance and the applicability of section 36(1)(iii) of the Income Tax Act, 1961.

In the assessment year in question, the assessee had given interest-free advances to a sister concern, while also having interest-free loans from family members. The Revenue disallowed the interest expenses under section 36(1)(iii) based on the judgment of the High Court. However, the Commissioner (Appeals) deleted the addition, emphasizing that the interest-free funds available with the assessee covered the advance made to the sister concern. The Commissioner highlighted the logical basis of the Assessing Officer's actions in previous years and concluded that the disallowance made in the current year was unwarranted.

During the Tribunal hearing, the Revenue argued that the case aligned with the High Court's decision in a previous judgment. On the other hand, the assessee's counsel relied on the Commissioner's order and presented a chart illustrating the issue across multiple assessment years. The Tribunal noted the consistency required in assessing interest-free advances and loans, emphasizing that the Revenue's differing views between assessment years could not be justified. Referring to relevant case law, the Tribunal upheld the Commissioner's decision, emphasizing the sufficiency of interest-free funds to cover the advance to the sister concern.

The Tribunal referenced various judgments, including those by the Apex Court and the Punjab & Haryana High Court, to support the decision. Notably, the Tribunal highlighted the need for a consistent and definitive approach by the Revenue in recognizing the nature of accounts to avoid contradictory findings. Ultimately, the Tribunal dismissed the Revenue's appeal, upholding the Commissioner's order and emphasizing the adequacy of interest-free funds to justify the interest-free advance to the sister concern.