2014 (9) TMI 1088 - AT - Income Tax

Addition u/s 36(i)(iii) - Held that - We have found that the assessee has enough own, interest free, funds to make advances to relatives without charging interest. In A.Yrs. 2006-07, 2007-08, and 2008-09 when CIT(A) deleted similar disallowances, did not file appeal, hence, to maintain consistency, this disallowance is not justified. The A.O. has not invoked the provisions of Section 36(i)(iii) of the Act. Notional interest cannot be charged as has been done in this case. There is no allegation of diversion of funds. It is also noticed that the assessee has also raised interest free loans. This, not being a case of diversion of funds, we cannot interfere in the impugned finding. The deletion made by ld. CIT(A) is quite justified. Therefore, we confirmed the finding of ld. CIT(A) and dismiss this appeal of revenue

Summary

Issues Involved:
Whether the deletion of addition of Rs. 82,15,611/- made after disallowance of interest by the ld. CIT(A) for A.Y. 2009-10 is justified.

Detailed Analysis:

Issue 1: Disallowance of Interest
The sole issue in this appeal was whether the ld. CIT(A) correctly deleted the addition of Rs. 82,15,611/- made after disallowance of interest by the Assessing Officer. The assessee derived income from various sources, including interest on loans and advances, fixed deposits, security deposits, and share of profit from a partnership firm. The Assessing Officer disallowed a sum of Rs. 82,15,611/- as interest expenses claimed, citing that the assessee had given interest-free advances to close relatives. The ld. CIT(A) deleted this addition while deciding the issue regarding disallowance along with other connected matters.

Issue 2: Arguments Presented
The Department argued that the assessee should charge interest on interest-free advances given to related persons, as the assessee was charging interest on his capital in the partnership firm and from other parties to whom loans were given. The Department contended that the interest-free advances were not for business purposes or commercial expediency. On the other hand, the assessee's representative argued that there was no diversion of borrowed funds, and the case fell under Section 36(i)(iii) rather than Section 37 of the Act. The representative also highlighted that notional interest should not be charged, and the A.O. had not invoked the provisions of Section 36(i)(iii) in this case.

Issue 3: Tribunal's Decision
After considering the submissions and evidence, the Tribunal found that the assessee had sufficient interest-free funds to make advances to relatives without charging interest. The Tribunal noted that in previous assessment years where similar disallowances were made and deleted by the CIT(A), the Department did not file a second appeal. The Tribunal emphasized that there was no diversion of funds by the assessee, and notional interest could not be charged. The Tribunal upheld the deletion made by the ld. CIT(A), stating that the disallowance was not justified, and confirmed the finding of the ld. CIT(A), dismissing the appeal of the revenue.

In conclusion, the Tribunal's decision upheld the deletion of the addition of Rs. 82,15,611/- made after disallowance of interest, emphasizing that the assessee had sufficient own funds to provide interest-free advances to relatives without the need to charge interest.