2015 (10) TMI 1517 - HC - Income Tax

Disallowance of interest u/s 36(1)(iii) in respect of interest free advances - CIT(A) deleted the disallowance - Held that - Three appeals preferred by the revenue in relation to assessment years 1993-94, 1994-95 and 1995-96 were heard together by the Tribunal and by a common order dated 01.11.2006, the Tribunal dismissed all the three appeals by following its decision in the case of ACIT v. Torrent Financiers, (2001 (6) TMI 165 - ITAT AHMEDABAD-A ) wherein it was held that if the total interest free advances including debit balance of partners of assessee firm do not exceed the total interest free funds available with the assessee, no interest is disallowable on account of utilization of funds for non-business purpose. The Tribunal noticed that the Commissioner (Appeals) had after examining the details furnished by the assessee, gave a categorical finding that the non-interest bearing funds available with the assessee were sufficient to cover up the interest free advance. The Tribunal agreed with the concurrent findings of fact recorded by the Commissioner (Appeals) and noted that the assessee had interest free funds which were sufficient to cover the interest free loans. Besides, the Assessing Officer had not made out any case that the assessee had utilized borrowed funds other than for business purposes and upheld the deletion of allowance by the Commissioner (Appeals). - Decided in favour of assessee.

Summary

Issues: Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961 on interest-free advances.

Analysis:
1. The High Court considered the appeal concerning the disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961. The question of law was whether the Appellate Tribunal was correct in confirming the order passed by the CIT (A) deleting the disallowance of interest u/s 36(1)(iii) related to interest-free advances.

2. The case pertained to the assessment year 1995-96, where the Assessing Officer disallowed a sum under section 36(1)(iii) due to interest-free advances. The assessee argued that it had sufficient interest-free funds compared to the interest-free advances. The Commissioner (Appeals) deleted the disallowance based on the similarity of facts with a previous assessment year. The Tribunal upheld the Commissioner's decision, stating that if interest-free advances did not exceed interest-free funds, no disallowance should occur. It was noted that the assessee had utilized interest-free funds to cover the interest-free loans for business purposes.

3. During the hearing, arguments were presented by the senior standing counsel for the appellant and the advocate for the respondent.

4. The High Court acknowledged that a previous appeal related to assessment year 1993-94 had been dismissed. Based on the judgment in that appeal, the Court answered the question in favor of the assessee and against the revenue.

5. Consequently, the appeal was dismissed in line with the previous judgment, affirming the deletion of the disallowance of interest on interest-free advances.