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2013 (8) TMI 518 - AT - Income TaxDisallowance of interest expenditure - CIT upheld proportionate interest - Held that - Assessee has granted interest free loan to a related party - there was sufficient fund available with the company in the form of reserves and surplus. Further nothing has been brought on record by Revenue to prove that interest bearing loans taken by the Assessee for the purpose of own business has been diverted for non business purposes or for lending to related party - No direct nexus has been proved either by Assessing Officer or by CIT(A) between the interest bearing loans taken and the interest free loans granted - If there are funds available both interest free and over draft and or loans taken than a presumption would arise that investment would be out of interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investment - No disallowance can be made - Following decision of CIT vs. Raghuvir Synthetics 2013 (7) TMI 806 - GUJARAT HIGH COURT - Decided in favour of assessee.
Issues Involved:
1. Disallowance of interest on interest-free loan to Gharda Foundation. 2. Disallowance of interest on receivables from Gharda Chemicals Ltd. Detailed Analysis: Issue 1: Disallowance of Interest on Interest-Free Loan to Gharda Foundation The Assessee, a company engaged in manufacturing insecticides and pesticides, had granted an interest-free loan of Rs. 2,50,00,000 to Gharda Foundation. The Assessing Officer (AO) disallowed the interest expenditure of Rs. 68.55 lakhs, arguing that the funds were not used for business purposes. The CIT(A) upheld this disallowance, stating that the interest-free loan to Gharda Foundation lacked business expediency. The CIT(A) directed the AO to calculate the disallowance proportionately based on the period the loan was outstanding. The Assessee argued that it had sufficient interest-free funds (reserves and surplus increased by Rs. 9.40 crore) to cover the loan to Gharda Foundation. The Assessee relied on the Bombay High Court's decision in CIT vs. Reliance Utilities and Power Limited, which held that if both interest-free and interest-bearing funds are available, it is presumed that investments are made from interest-free funds. The Gujarat High Court in CIT vs. Raghuvir Synthetics Limited also supported this view, stating that interest-free loans to sister concerns are allowable if there are sufficient interest-free funds and no evidence of diversion of borrowed money. The Tribunal, considering these precedents and the Assessee's financials, concluded that no disallowance of interest was warranted since the Assessee had sufficient interest-free funds. Thus, the Assessee's appeal on this ground was allowed. Issue 2: Disallowance of Interest on Receivables from Gharda Chemicals Ltd The AO observed that the Assessee had not charged interest on receivables of Rs. 8,01,40,700 from its holding company, Gharda Chemicals Ltd, and disallowed the interest expense of Rs. 68.55 lakhs, claiming it was a diversion of interest-bearing funds. The CIT(A) deleted this addition, referencing an earlier ITAT decision in the Assessee's favor for A.Y. 2001-02, which held that the Assessee's transactions with Gharda Chemicals Ltd were regular business transactions and not for siphoning off funds. The Tribunal noted that the facts of the current appeal were identical to those of A.Y. 2001-02. It reiterated that the Assessee had regular business transactions with Gharda Chemicals Ltd and that the outstanding dues were part of normal business operations. The Tribunal emphasized that the AO's disallowance was based on presumptions without concrete evidence of fund diversion. Following the precedent set in the Assessee's earlier case, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal on this ground. Conclusion: The Assessee's appeal regarding the disallowance of interest on the loan to Gharda Foundation was allowed, and the Revenue's appeal regarding the disallowance of interest on receivables from Gharda Chemicals Ltd was dismissed. The Tribunal's decisions were based on established legal principles and precedents, affirming that the Assessee had sufficient interest-free funds and that the transactions with Gharda Chemicals Ltd were part of regular business operations.
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