2019 (4) TMI 1784 - AT - Income Tax

Disallowance of interest u/s. 36(1)(iii) - HELD THAT - It is not in dispute that the assessee has sufficient interest free funds for making investments or for advancing loans to sister concerns. This fact is not disputed by the Revenue. In view of the of the decision in the case of CIT v. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein it has been held that, if assessee has sufficient interest free funds to meet its investments and assessee had raised a loan it may be presumed that the investments were made from interest free funds available to the assessee. In view of this position, we are of the view that the CIT(A) had rightly deleted the disallowance. Hence, we reject the ground raised by the Revenue on this issue. Disallowance of interest - assessee paid interest to the creditors and no interest has been charged on debtors - HELD THAT - U/s 36(1)(iii) to sustain a claim for deduction of the amount of interest, all that is necessary is that the capital must have been borrowed by the assessee, it must have been borrowed for the purpose of business or profession of the assessee and thirdly, that the assessee should have paid that amount by way of interest. Consideration for paying interest to trade creditors and for not charging interest from trade debtors can be different, and therefore, just because the assessee has not charged interest from its trade debtors, interest paid by it to it trade creditors could not be disallowed as a deduction especially when there is no dispute about the genuineness of the payment. Therefore, we confirm the order of the CIT(A) and dismiss the department appeal

Summary

Issues involved:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act.
2. Disallowance of interest paid on overdue purchases.

Issue 1: Disallowance of interest under section 36(1)(iii) of the Income Tax Act:
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of interest amounting to ?89,71,506 under section 36(1)(iii) of the Act. The Assessing Officer disallowed this interest as the assessee advanced interest-free loans to a sister concern. However, the Commissioner accepted the assessee's contention that no interest should be disallowed since the assessee had sufficient interest-free funds, citing the decision in the case of CIT v. Reliance Utilities and Power Ltd. The Tribunal upheld the Commissioner's decision, noting that the assessee had ample interest-free funds to justify the investments and loans made. The Tribunal concluded that the disallowance was rightly deleted based on the legal precedent and rejected the Revenue's appeal on this issue.

Issue 2: Disallowance of interest paid on overdue purchases:
The second ground of appeal by the Revenue concerned the disallowance of interest amounting to ?25,94,362 under section 36(1)(iii) due to the assessee paying interest on overdue purchases without charging interest on debtors. The assessee argued that this was a business decision and a matter of commercial expediency. The Commissioner, relying on the decision in DCIT v. Kamdar Constructions, deleted the disallowance, emphasizing that the assessee had sufficient interest-free funds from share capital and reserves. The Tribunal upheld the Commissioner's decision, stating that the disallowance was not justified as per the legal principles and case law cited. Consequently, the Tribunal rejected the Revenue's appeal on this issue as well.

In conclusion, the Appellate Tribunal ITAT MUMBAI dismissed the Revenue's appeal, upholding the decisions of the Commissioner of Income Tax (Appeals) regarding the disallowance of interest under section 36(1)(iii) and interest paid on overdue purchases. The Tribunal found that the assessee had adequate interest-free funds to support its financial transactions, leading to the deletion of the disallowances based on legal precedents and commercial considerations.