2017 (2) TMI 1452 - AT - Income Tax

Addition on account of interest payments - borrowed funds have been diverted for non business purposes - Whether the assessee had sufficient capital and interest-free funds? - AO found that the assessee has advanced interest bearing funds to some of persons from which either no interest is charged or the same is charged at lesser rate whereas the assessee has paid interest @ 12% on loan taken - HELD THAT - A.O. has failed to establish that interest free advances to above stated parties were out of interest bearing funds. It is the contention of the assessee that it had sufficient non-interest bearing funds to the tune of ₹ 34.42 crores as per balance sheet as on 31.03.2010 as against interest bearing funds offered at ₹ 10.74 crores. Hence, interest-free funds of ₹ 34.52 crores have been utilised for giving interest-free advances to aforesaid above parties on which no interest was charged. Thus interest-free advance were given out of interest-free funds available with the assessee during the year for which sufficient interest-free funds were available. Therefore, we are of the view that the Ld. A.O. has failed to establish that interest free advances to above stated four parties were out of interest bearing funds. We find that the AO has not been able to establish the nexus between interest bearing funds utilized for non business purpose as held in SA BUILDERS LTD. VERSUS COMMISSIONER OF INCOME-TAX 2006 (12) TMI 82 - SUPREME COURT . In CIT vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein it was held that if there was 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 funds generated or available with the company, if the interest free funds were sufficient to meet the investments. In the present case, the sufficient interest free funds were available at the disposal of the assessee. Therefore, presumption would go in favour of the assessee that the interest free funds were given out of interest free funds available at the disposal of the assessee as per balance sheet of the assessee. - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of interest payments on borrowed funds for non-business purposes.
2. Undervaluation of stock.

Analysis:

Issue 1: Disallowance of interest payments on borrowed funds for non-business purposes

The appeal was against the confirmation of the addition of interest payments on borrowed funds by the Commissioner of Income Tax (Appeals) for the Assessment Year 2010-11. The Assessing Officer (AO) disallowed interest of ?11,60,840, alleging that the assessee diverted interest-bearing funds for non-business purposes. The AO found that the assessee advanced interest-bearing funds to others without charging interest or at a lower rate compared to the interest paid by the assessee. The Commissioner upheld the AO's decision, stating that the assessee failed to counter the findings. However, the assessee contended that it had substantial interest-free funds available, supporting this claim with a detailed table of funds utilization. The assessee argued that the interest-free advances were given from interest-free funds and not diverted from interest-bearing funds. The Tribunal agreed with the assessee, citing various legal precedents and judgments. The Tribunal found that the AO failed to establish a nexus between interest-bearing funds and non-business purposes. Relying on Supreme Court and High Court decisions, the Tribunal concluded that no disallowance of interest was warranted. Therefore, the disallowance of interest was deleted, and the appeal was allowed on this ground.

Issue 2: Undervaluation of stock

Ground No.3 of the appeal, related to the undervaluation of stock, was not pressed by the assessee and was dismissed. As a result, the appeal was partly allowed concerning the disallowance of interest payments but dismissed regarding the undervaluation of stock.

In conclusion, the Tribunal ruled in favor of the assessee, deleting the disallowance of interest payments on borrowed funds for non-business purposes based on the lack of evidence establishing diversion of interest-bearing funds. The Tribunal dismissed the issue of undervaluation of stock as it was not pressed by the assessee.