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2016 (1) TMI 854 - AT - Income TaxDisallowance of interest expenses - CIT(A) deleted the addition - whether the assessee was having adequate interest free funds at its disposal without considering the fact that had interest free funds would been available with the assessee then the assessee would not applied for debt restricting with the financial institutions - Held that - Assessee has huge interest free fund available with it and therefore the disallowance u/s 36(1) (iii) on account of advances given to other parties from of interest cannot be disallowed. Therefore we confirm the order of CIT (A) in deleting the disallowance on account of amounts advanced to sister concerns without charging interest. - Decided in favour of assessee. Disallowance of club membership fees holding that these are of personal nature - Held that - Club membership fees paid for employees is allowable u/s 37 of the Act. Before CIT (A) assessee has given detailed list of persons for whom the membership is taken. Therefore disallowance of club membership is deleted. Ground of the appeal is allowed.- Decided in favour of assessee.
Issues Involved:
1. Deletion of disallowance of interest expenses for AY 2008-09. 2. Disallowance of club membership fees for AY 2010-11. 3. Disallowance of interest expenditure for AY 2010-11. Issue-wise Detailed Analysis: 1. Deletion of Disallowance of Interest Expenses for AY 2008-09: The revenue challenged the deletion of interest disallowance amounting to Rs. 24,05,333/- by the CIT (A), arguing that the assessee had adequate interest-free funds at its disposal and questioning the commercial expediency of the advances made. The revenue cited the decision in CIT vs. Abhishek Industries Ltd., which places the onus on the assessee to establish a nexus between interest-free funds and advances. The assessee contended that the advances to Netcradel India Pvt. Ltd. were for business purposes and that no advances were given to Saffron Range IT Solution Pvt. Ltd. during the year. The assessee also argued that it had substantial interest-free funds amounting to Rs. 52.64 crores, which were more than sufficient to cover the advances. The Tribunal noted that the assessee had a share capital of Rs. 35 crores and total interest-free funds amounting to Rs. 36,39,51,960/-, against which the advances given were Rs. 2,08,28,625/-. The Tribunal found no nexus between interest-bearing funds and the advances. The CIT (A) had examined each transaction and confirmed a disallowance of Rs. 5,20,783/- while deleting Rs. 24,05,333/-. The Tribunal upheld the CIT (A)'s decision, referencing judicial precedents such as CIT v. Munjal Sales Corporations and CIT v. Reliance Utilities Limited, which support the principle that if interest-free funds exceed the amount of non-interest-bearing advances, disallowance of interest cannot be made in the absence of a nexus. 2. Disallowance of Club Membership Fees for AY 2010-11: The assessee appealed against the disallowance of Rs. 1,32,092/- for club membership fees, which the AO and CIT (A) had treated as personal expenses. The Tribunal referenced the Supreme Court's ruling that club membership fees paid for employees are allowable under Section 37 of the Act. The assessee provided a detailed list of employees for whom the membership was taken. Consequently, the Tribunal reversed the CIT (A)'s order and allowed the expenditure as a business expense. 3. Disallowance of Interest Expenditure for AY 2010-11: The assessee also appealed against the disallowance of interest expenditure amounting to Rs. 29,63,872/-. Both the assessee and the revenue agreed that the facts and circumstances were identical to those in AY 2008-09. The Tribunal reiterated its earlier decision, noting that the assessee had sufficient interest-free funds to cover the advances made to sister concerns, and thus, no disallowance of interest was warranted. The Tribunal allowed this ground of appeal. Conclusion: The Tribunal dismissed the revenue's appeal for AY 2008-09 and allowed the assessee's appeals for AY 2010-11, thereby confirming the deletion of interest disallowance and allowing the club membership fees and interest expenditure as business expenses.
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