2015 (10) TMI 997 - AT - Income Tax

Addition made on interest free loan to M/s Uma Overseas - Held that - As decided by Tribunal in assessee s own case for A.Y. 2007-08 2015 (10) TMI 995 - ITAT AGRA it is an undisputed position that interest free funds available to the assessee are far in excess of the interest free advances given by the assessee. In the documents filed before us, it is shown that the assessee had a capital of ₹ 176 lakhs and business profit of ₹ 82.45 lakhs, and both these amounts put together are far in excess of the interest free investments made by the assessee. With these undisputed facts in mind, let us take a look at the legal position laid down by Hon ble Bombay High Court, in the case of CIT Vs Reliance Utilities & Power Ltd (2009 (1) TMI 4 - HIGH COURT BOMBAY), as stated thus, The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments . On the basis of this principle, as has been consistently held by coordinate benches of this Tribunal, as long as interest free funds available to an assessee are in excess of the non business investments or interest free advances, presumption has to be that investments or interest free advances are out of interest free advances, and, accordingly, disallowance in respect of interest paid on borrowings cannot be made on the ground that the borrowed monies have not been used for business purposes. The impugned interest dis allowances are, accordingly, deleted - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest on interest-free loan to M/s Uma Overseas
2. Enhancement under section 36(1)(iii) on interest-free loan/advance to Smt. Mamta Agarwal
3. Addition on adhoc basis for cash payments made

Analysis:

Issue 1: Disallowance of interest on interest-free loan to M/s Uma Overseas
The appellant challenged the correctness of the order passed by the Ld. CIT(A) regarding the addition of Rs. 1,25,000 made by the Assessing Officer on an interest-free loan to M/s Uma Overseas. The Tribunal referred to a previous order in the appellant's own case for A.Y. 2007-08, where it was observed that if interest-free funds available to the assessee exceed interest-free advances given, a presumption arises that investments are made out of interest-free funds. Relying on this principle, the Tribunal deleted the disallowance, upholding the appellant's grievance.

Issue 2: Enhancement under section 36(1)(iii) on interest-free loan/advance to Smt. Mamta Agarwal
The appellant contested the enhancement made by the Ld. CIT(A) under section 36(1)(iii) on an interest-free loan/advance given to Smt. Mamta Agarwal. The Tribunal, following its previous order in the appellant's case for A.Y. 2007-08, upheld the appellant's grievance and deleted the disallowance, as the interest-free funds available to the assessee were in excess of the non-business investments or interest-free advances.

Issue 3: Addition on adhoc basis for cash payments made
The Assessing Officer disallowed Rs. 2,00,000 for cash payments made by the appellant during the assessment proceedings. The disallowance was based on the grounds of unverifiable expenses and cash payments for goods. The Ld. CIT(A) upheld the disallowance but restricted it to Rs. 1,00,000. However, the Tribunal found no cogent material to justify the disallowance and deemed it fit to delete the impugned disallowance, as the mere fact that payments were made in cash and some vouchers were self-made did not negate the genuineness of the expenditure incurred.

In conclusion, the Tribunal allowed the appellant's appeal, deleting the disallowances made by the authorities in all three issues raised by the appellant.