2014 (5) TMI 314 - AT - Income Tax

Disallowance of interest Nexus between interest free loans out of interest bearing funds Held that - The assessee has given interest free loan to various persons - The availability of various interest free loans and funds have also been provided which goes to show that at the year-end such interest free loans were at Rs. 29,76,48,648 CIT(A) has held that interest free loan is out of these funds only - findings of the CIT(A) appears to be prima-facie correct - during the month of April 2005 itself, the assessee has received huge interest free loans which aggregated to more than Rs. 50 crores - a presumption can be drawn that the interest free loan has been given out of these interest free unsecured loans received by the assessee thus, there is no reason to interfere in the order of the CIT(A). The assessee has also given huge loans which are interest bearing and on which the assessee had shown interest income of Rs. 1.96 crores - The interest which has been incurred for the purpose of the business, has been shown at Rs. 1.83 crores, which has been claimed as deduction u/s 36(1)(iii) - Such a claim of deduction cannot be disallowed, unless it has been shown that the assessee has actually diverted its interest bearing loan either for some non-business purpose of for personal use - There is no diversion of interest bearing loan for any other purpose except for the purpose of the business Decided against Revenue. the claim of the assessee under section 36(1)(iii) cannot be disallowed. Thus, the finding and the conclusion drawn by the learned Commissioner (Appeals) appears to be factually and legally correct and we decline to interfere in the matter as such. Thus, the ground raised by the Revenue is dismissed.

Summary

Issues:
Challenging deletion of addition representing interest on interest-free loans without proving nexus between loans, availability of interest-free funds, disallowance under section 36(1)(iii).

Analysis:
1. The Revenue appealed against the deletion of an addition of Rs. 19,38,913 representing interest on interest-free loans. The Assessing Officer noted the company's activities involving both interest-bearing and interest-free loans. The assessee argued that interest should only be disallowed if given from interest-bearing funds, providing a working based on the product method. The amount was held disallowable by the AO.

2. Before the Commissioner (Appeals), the assessee contended that substantial interest-free funds were used for loans, citing relevant court decisions. The Commissioner noted the availability of interest-free funds and held the interest-free loans given were justified. He also accepted the interest paid as business expenses under section 36(1)(iii), citing relevant case law.

3. The Departmental Representative argued that the availability of interest-free funds at the time of loan advancement was not examined, citing the company's low reserves in 2005. The Counsel countered, emphasizing the substantial interest-free funds available and the loans given to outsiders for business purposes.

4. The Tribunal found the Commissioner's decision correct, noting the availability of interest-free funds, the loans given, and the business purpose of interest payments. It held that interest-free loans were given from available funds and interest paid was for business purposes, thus dismissing the Revenue's appeal.

5. The Tribunal's decision upheld the Commissioner's findings, emphasizing the company's legitimate use of interest-free funds and interest payments for business purposes. The appeal was dismissed, affirming the allowance of interest as business expenses under section 36(1)(iii).

This detailed analysis covers the issues raised in the judgment, including the challenge to the deletion of the addition representing interest on interest-free loans, the availability of interest-free funds, and the justification for the interest payments as business expenses under section 36(1)(iii).