2015 (8) TMI 1146 - AT - Income Tax

Disallowance under section 36(1)(iii) - utilisation of interest bearing funds for non-business activities - Held that - The entire thrust of the assessee s submissions from the very beginning was that the amounts were advanced to group concerns, keeping in view the restrictions imposed by the Land Acquisition Act and this aspect we find has not at all been addressed by the lower Revenue authorities. If the advances were given out of commercial expediency then it is settled law that no disallowance is called for. From the details reproduced from balance-sheet as above it appears that the amounts were advanced for various purchases and, therefore, it could not be concluded that the interest-free advances given to group concerns, were not for business purposes. We find that these aspects have not at all been examined by the lower Revenue authorities and no findings have been recorded as to the purpose for which interest-free advances were given to group companies. The assessee s submissions are quite convincing that considering the restrictions imposed by the Land Acquisition Act, it had entered into various collaboration agreements. The Assessing Officer is required to record specific finding on these aspects before coming to the conclusion that the entire interest-free advance given to group concerns were not for business purposes. Thus restore the matter back to the file of the Assessing Officer to examine the issue de novo - Decided in favour of assessee for statistical purpose.

Summary

Issues:
Disallowance under section 36(1)(iii) of the Income-tax Act, 1961 based on utilization of interest-bearing funds for non-business activities.

Analysis:
The appeal was against the order of the Commissioner of Income-tax (Appeals) relating to the assessment year 2009-10. The Assessing Officer disallowed an amount under section 36(1)(iii) due to the utilization of interest-bearing funds for non-business activities. The assessee, a developer in the real estate business, had entered into agreements for land development and had shown income from land rights transfer, interest income, and rental income. The Assessing Officer observed discrepancies in the financial charges claimed by the assessee against the income earned, leading to the disallowance. The assessee contended that the advances to group companies were for commercial expediency due to restrictions under the Land Acquisition Act.

The Assessing Officer concluded that interest-free advances and loans to group concerns lacked commercial expediency and business purpose, leading to the disallowance under section 36(1)(iii). The Commissioner of Income-tax (Appeals) upheld this decision, emphasizing the lack of benefit or business justification for the interest-free investments and loans. The Commissioner relied on case law to support the decision. The assessee appealed, arguing that the advances were made for business purposes and commercial expediency, not for acquiring controlling interests in group companies.

The Tribunal found that the lower authorities did not address the aspect of advances made due to restrictions under the Land Acquisition Act and commercial expediency. The Tribunal noted that the lower authorities failed to examine the purpose of interest-free advances to group concerns and set aside the decision. The matter was remanded back to the Assessing Officer for a fresh examination, specifically considering the availability of own funds and collaboration agreements to determine if the advances were made for business expediency. The appeal was allowed for statistical purposes.

In conclusion, the Tribunal's decision emphasized the need for a detailed examination of the purpose behind interest-free advances to group concerns and the commercial expediency involved. The case highlighted the importance of establishing a direct nexus between the funds utilized and the business activities to determine the applicability of disallowance under section 36(1)(iii) of the Income-tax Act, 1961.