2014 (7) TMI 385 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) of the Act Applicability of section 43B(e) of the Act Held that - The assessee company is engaged in business of manufacturing of polyester yarn and dealing in cotton yarn and waste - the assessee company debited an amount of ₹ 69,76,984/- to its profit and loss account on account of interest paid on loans taken from banks amounting to ₹ 4,47,24,765 - The assessee company had also given interest free advances to various persons amounting to ₹ 47,38,005 - the decision in assessee's own case for the earlier assessment year followed - the issue relating to the interest disallowance has already been restored by the Tribunal in the own case of the assessee for the preceding assessment years to the file of the AO thus, the matter is to be remitted back to the AO for fresh adjudication - The AO will also decide the alternative issue relating to the above interest disallowance u/s 43(B) of the Act Decided in favour of Assessee.

Summary

Issues:
- Disallowance of interest under section 36(1)(iii) of the Income Tax Act
- Disallowance of interest under section 43B(e) of the Act

Issue 1: Disallowance of interest under section 36(1)(iii) of the Income Tax Act
The appellant challenged the disallowance of Rs. 97,51,956 made under section 36(1)(iii) of the Income Tax Act. The appellant contended that the interest disallowance was not justified as the borrowed funds were utilized for business purposes. The Assessing Officer (AO) disallowed a proportionate interest amount for giving interest-free advances, stating that the onus was on the assessee to show that borrowed funds were used for business. The AO found that borrowed funds were used for interest-free advances, leading to the disallowance. The Commissioner of Income Tax (Appeals) upheld the AO's decision, emphasizing that interest-free advances were not justified under commercial expediency. The appellant cited a Supreme Court decision regarding commercial expediency, but the CIT(A) found it inapplicable due to differences in recipient companies. The Tribunal had previously restored similar disallowances in the appellant's favor for preceding assessment years, directing fresh adjudication by the AO to consider commercial expediency. The Tribunal also directed the AO to afford a reasonable opportunity for the assessee to be heard.

Issue 2: Disallowance of interest under section 43B(e) of the Act
The AO also invoked section 43B(e) of the Act to disallow the interest amount, as the interest claimed to be paid was neither actually paid nor shown as payable/outstanding in the balance sheet. The appellant challenged this alternative finding, citing a Bombay High Court case that held non-payment of interest to a Co-Operative bank did not attract section 43B. The Tribunal, considering the previous restoration of similar issues in the appellant's favor, restored this issue to the AO for fresh adjudication. The AO was directed to consider relevant case laws, including the cited Bombay High Court decision, and provide the appellant with a proper opportunity to present its case. Ultimately, the appeal of the assessee was allowed for statistical purposes, maintaining consistency with the Tribunal's previous decisions in the appellant's favor.

In conclusion, the judgment addressed the disallowance of interest under two sections of the Income Tax Act, emphasizing the need to prove commercial expediency and proper utilization of borrowed funds for business purposes. The Tribunal's decision to restore the issues for fresh adjudication by the AO aimed to ensure fairness and opportunity for the assessee to present its case effectively.