2016 (10) TMI 1104 - HC - Income Tax

Disallowance u/s. 36(1)(iii) - nexus between interest bearing funds and interest free advances - proportionate disallowance of interest - Held that - Tribunal in the impugned order rendered a finding of fact that the Respondent-Assessee had its own sufficient funds available to make advances it had made to its sister concern. This on the basis that the assertions of Respondent-Assessee to the above effect were not controverted before the Tribunal at the time of hearing nor in the remand report of the Assessing Officer. The impugned order of the Tribunal about availability of sufficient interest-free funds with the Respondent-Assessee to make advances to its sister concerns, is finding of fact. The same is being assailed without in any manner showing the same to be perverse. Hence, the question as framed does not give rise to any substantial question of law. Thus, not entertained.

Summary

Issues:
Challenge to the order of the Income Tax Appellate Tribunal regarding disallowance under Section 36(1)(iii) of the Income Tax Act, 1961 for Assessment Year 2005-06.

Analysis:
The Revenue contested the Tribunal's decision to delete the disallowance under Section 36(1)(iii) of the IT Act, questioning the nexus between interest-bearing funds and interest-free advances. The Respondent, engaged in construction business, claimed interest expenditure of ?2.32 Crores on borrowed funds. The Assessing Officer disallowed ?54.92 lakhs as interest paid, proportionate to interest-free advances to sister concerns, partly under Section 14-A and partly under Section 36(1)(iii) of the Act.

The Commissioner of Income Tax (Appeals) set aside the Assessing Officer's order, returning the issue for fresh consideration. Both the Revenue and the Assessee appealed to the Tribunal, disputing the need for the CIT (A) to remand the issue. The Tribunal then examined whether the Assessee had sufficient interest-free funds for the advances to sister concerns. After submissions and a remand report, the Tribunal found that the Assessee indeed had enough funds, citing the decision in CIT v. Reliance Utilities & Power Ltd. The Tribunal concluded that the disallowance of partial interest paid on loans was unjustified.

The Tribunal's factual determination regarding the availability of interest-free funds was upheld, with the Court deeming it non-perverse. Consequently, the question raised did not present a substantial legal issue, leading to the dismissal of the Appeal without costs.