2019 (3) TMI 1812 - AT - Income Tax

Disallowance u/s 36(1)(iii) - Interest free loans and advances extended by the assessee company to various parties - HELD THAT - Assessee s own fund have been utilized for the purpose of advances to various parties. The assessee company has huge surplus funds at its disposal. Sufficient interest free fund was available with the assessee out of which interest free loan and advances were provided to parties. Whether the decision as to how much is a reasonable expenditure ought to have been decided by the assessee company; the revenue cannot question that once the nexus between the expenditure and the purpose of business has been established as already decided by the number of judgments pronounces by different legal forum including the judgment passed in the case of CIT-vs-Dalmia Cement (P.) Ltd. 2001 (9) TMI 48 - DELHI HIGH COURT - Assessee s appeal is allowed.

Summary

Issues:
Assessment of interest free loans and advances provided by the assessee company to related parties.

Analysis:
The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals) and the Income Tax Officer for the Assessment Year 2012-13. The appellant company declared income at Rs. Nil and submitted details of interest free loans and advances extended to various parties. The Assessing Officer (AO) found that the funds raised for business were diverted to provide interest free loans to related parties, leading to disallowance of an amount under section 36(1)(iii) of the Income Tax Act, 1961. The appellant contended that the loans were provided from its own funds, including capital fund, free reserves, and unsecured loans, and argued that interest expenses should be allowed as a deduction. The appellant cited the case of Dalmia Cement (B) Ltd. (2002) 254 ITR 377 to support their argument. The dispute centered on whether the interest free loans were provided out of own funds for business purposes.

During the appeal hearing, it was revealed that the appellant's own funds were indeed utilized for providing advances to various parties. Details of party-wise advances and owned funds were presented. The interest free fund available with the appellant was substantial, and the loans and advances were provided from these funds. The Tribunal observed that once the nexus between the expenditure and the purpose of business is established, the revenue cannot question the reasonableness of the expenditure. Citing legal precedents, including the judgment in the case of CIT-vs-Dalmia Cement (P.) Ltd. (2002) 254 ITR 377, the Tribunal held that there was no basis for disallowance under section 36(1)(iii) of the Act. Consequently, the addition made by the lower authorities was deleted, and the appellant's appeal was allowed.

In conclusion, the Tribunal ruled in favor of the appellant, highlighting that the interest free loans and advances provided by the company to related parties were justified as they were extended from the company's own funds for business purposes. The decision emphasized the importance of establishing a clear nexus between expenditures and the business purpose to determine the allowability of deductions under the Income Tax Act.