2015 (9) TMI 70 - AT - Income Tax

Disallowance of interest on borrowed funds - Held that - The assessee was having sufficient interest-free funds at the time of advances made to its sister-concerns can be verified from its records. The ld.Sr.DR has no objection to this proposal. Therefore, after taking into consideration and looking to the totality of the facts of the case we hereby set aside the orders of the authorities below and restore the issue back to the file of the AO for limited purpose of verification. The AO would verify from the records placed before him that the fact of availability of interest-free funds for the purpose of making advances to its sister-concerns. In case, the AO finds that the assessee was having sufficient interest-free funds available for making advances to its sister-concerns, the AO would delete the disallowance. However, the AO would also verify whether the borrowed funds had been utilized for business purposes or not. In the event of the mixed funds, if at the time of making advances the assessee had both the borrowed funds as wells as the interest-free funds, the AO would verify the quantum of advances made by the assessee. If the AO finds that the amount of interest-free funds was higher than the advances made, in that event, the AO would delete the addition made on account of disallowance of interest on borrowed funds - Decided in favour of assessee for statistical purposes. Disallowance u/s.36(i)(iii) - advances given to sister concern - assessee submitted that these loans are not liable for tax even u/s.41(1) - Held that - CIT(A) has followed the judgement of Hon ble Apex Court rendered in the case of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. reported at (1996 (9) TMI 1 - SUPREME Court ). The contention of the ld.counsel for the assessee is that the facts are distinguishable in the present case as in that case it was trading a receipt, but in the present case these are the loans by the sister-concerns being capital in nature. Since the evidence in support of this contention was not furnished before the AO, therefore, it would be appropriate that the issue be restored to the file of AO for verifying the claim of the assessee that the impugned amount was not a trading receipt. The AO would verify the nature of amount and in case it is found that it was not a trading advance, then the AO would delete the same - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act.
2. Applicability of the decision in S.A. Builders Limited vs. CIT.
3. Consistency in disallowance across different assessment years.
4. Disallowance of interest on advances given to sister concerns.
5. Adhoc disallowance of various expenses.
6. Taxability of inter-company balance written back.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The assessee challenged the disallowance of interest expenditure amounting to Rs. 66,44,817/- for AY 2004-05, Rs. 54,76,790/- for AY 2005-06, and Rs. 46,31,906/- for AY 2006-07. The contention was that the advances to sister concerns were made out of interest-free funds for commercial expediency. The assessee argued that there were no new borrowings during the years under appeal and that sufficient interest-free funds were available. The Tribunal directed the Assessing Officer (AO) to verify the availability of interest-free funds and to delete the disallowance if such funds were found sufficient for the advances made.

2. Applicability of the Decision in S.A. Builders Limited vs. CIT:
The assessee cited the Supreme Court's decision in S.A. Builders Ltd. vs. CIT (2007) 288 ITR 01 (SC), which allows interest deductions if the advances to sister concerns are for commercial expediency. The Tribunal agreed with the assessee's reliance on this judgment, emphasizing that commercial expediency should be considered, and directed the AO to reassess the disallowance in light of this principle.

3. Consistency in Disallowance Across Different Assessment Years:
The assessee argued that similar advances in previous years had not been disallowed by the Revenue, and thus, disallowance in the current years was inconsistent. The Tribunal acknowledged this argument and instructed the AO to consider the consistency of the Revenue's approach in previous years while reassessing the disallowance.

4. Disallowance of Interest on Advances Given to Sister Concerns:
The Tribunal noted that if the assessee could demonstrate that the advances were made from interest-free funds or for business purposes, the disallowance should not be made. The AO was directed to verify the source of funds and the purpose of the advances. If the interest-free funds exceeded the advances, the disallowance should be deleted.

5. Adhoc Disallowance of Various Expenses:
For AY 2004-05 and AY 2005-06, the assessee did not press the ground related to adhoc disallowance of Rs. 3,12,635/- and Rs. 2,61,500/- respectively, leading to dismissal of these grounds. For AY 2006-07, the Tribunal did not find independent adjudication necessary for the general grounds raised.

6. Taxability of Inter-Company Balance Written Back:
For AY 2006-07, the assessee contested the addition of Rs. 80,00,000/- being inter-company balance written back, arguing it was a capital receipt. The Tribunal found the assessee had not provided sufficient evidence to substantiate this claim before the AO. The Tribunal directed the AO to verify the nature of the amount. If found to be a non-trading advance, the AO was instructed to delete the addition.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the AO to reassess the disallowances and additions based on the verification of interest-free funds, commercial expediency, and the nature of inter-company balances. The Tribunal emphasized the need for consistency and adherence to judicial precedents in the reassessment process.