2012 (12) TMI 246 - AT - Income Tax

Addition on account of interest expenditure - assessee has both borrowed and interest free funds Held that - Assessee-company had sufficient interest free fund could be used towards loan and advances to sister concern - Revenue has not demonstrated as to how the interest bearing funds have been used towards loan/advances to the sister concern - entire interest free funds including the assessee s own capital and accumulated profits and other interest free credits and loans and if the total interest free advances including the debit balance of partners did not exceed the total free funds available with the assessee, interest was not disallowable merely on amount of utilization of the funds for non-business purpose - disallowance deleted

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income-tax Act.
2. Applicability of interest under Sections 234B and 234C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 36(1)(iii):

The primary issue in this case was the disallowance of Rs. 3,10,812 out of the interest expenditure claimed by the assessee under Section 36(1)(iii) of the Income-tax Act. The Assessing Officer (AO) disallowed this amount, arguing that the interest expense was not entirely for business purposes, as the assessee had advanced funds to a sister concern without charging interest.

The assessee contended that it had sufficient interest-free reserves and that the advances to the sister concern were made from these reserves, not from borrowed funds. The AO failed to establish a direct nexus between the borrowed funds and the advances made to the sister concern. The assessee relied on several judicial precedents, including the decisions of the Hon'ble Allahabad High Court in CIT v. Dhampur Sugar Mills Ltd. and CIT v. Prem Heavy Engineering Works P. Ltd., which supported the contention that if interest-free funds are available, no disallowance of interest on borrowed funds should be made.

The Revenue, on the other hand, argued that even if mixed funds are used, the assessee must establish the commercial expediency of the advances. They relied on the judgment of the Hon'ble Supreme Court in S.A. Builders Ltd. v. CIT, which emphasized the need to demonstrate that advances to sister concerns were for business purposes.

The Tribunal examined the rival submissions and judicial precedents. It noted that the assessee had sufficient interest-free funds, and the Revenue had not demonstrated that the borrowed funds were used for the advances. The Tribunal referred to the Hon'ble Gujarat High Court's decision in CIT v. Raghuvir Synthetics Ltd., which held that if interest-free funds are sufficient to cover the advances, no disallowance of interest is warranted. Consequently, the Tribunal directed the AO to delete the disallowance of Rs. 3,10,812.

2. Applicability of Interest under Sections 234B and 234C:

The second issue raised by the assessee was regarding the applicability of interest under Sections 234B and 234C of the Income-tax Act. The assessee argued that the interest had been wrongly charged and sought its deletion or reduction.

The Tribunal noted that this ground was consequential in nature and did not require separate adjudication, as it was dependent on the outcome of the primary issue regarding the disallowance of interest expenditure.

Conclusion:

In conclusion, the Tribunal allowed the assessee's appeal regarding the disallowance of interest expenditure, directing the AO to delete the disallowance of Rs. 3,10,812. The issue of interest under Sections 234B and 234C was deemed consequential and did not require separate adjudication. The assessee's appeal was partly allowed.