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2016 (12) TMI 1833 - AT - Income TaxDisallowance of interest expenses - interest @ 15% p.a. on advances given to various parties on which no interest has been charged - HELD THAT - Interest-free own funds available at the disposal of the assessee stands at Rs. 352.91 lakhs as on 31/03/2008 and Rs. 507.94 lakhs as on 31/03/2009. The corresponding interest-free advance as on 31/03/2009 stands at Rs. 21.10 lakhs. In such a situation where interest-free own funds available to the assessee are far in excess of the interest-free advance the presumption would arise in favour of assessee that the advances were made from interest-free funds available with the assessee. On this issue we find guidance from the judgement of Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT - In view of the huge funds available with the assessee without any interest liability - Thus the disallowance of interest towards interest-free advance is uncalled for - Decided in favour of assessee.
Issues:
Disallowance of interest on advances made to parties without charging interest, confirmation of disallowance by CIT(A), initiation of penalty proceedings not adjudicated. Analysis: 1. Disallowance of Interest on Advances: The appellant, engaged in manufacturing decorative veneers and related products, filed an appeal against the order of the Commissioner of Income Tax(Appeals) for AY 2009-10. The Assessing Officer noted that the appellant paid interest on borrowed funds but did not charge interest on advances given to certain parties. The AO disallowed interest of Rs. 3,16,599 on these advances, enhancing the appellant's income. The CIT(A) upheld this disallowance under section 36(1)(iii) of the Income Tax Act, 1961. However, the appellant contested this, arguing that interest-free advances to employees, including the wife of a long-serving employee, were a normal business practice enhancing mutual trust. The appellant had substantial interest-free own funds, far exceeding the interest-free advances. Citing judicial precedents, the Tribunal found in favor of the appellant, stating that the presumption should be in favor of the appellant when interest-free own funds exceed interest-free advances. Relying on relevant case laws, the Tribunal held that the disallowance of interest on interest-free advances was unjustified, allowing the appellant's appeal. 2. Confirmation of Disallowance by CIT(A): The CIT(A) confirmed the AO's disallowance of interest on advances, citing section 36(1)(iii) of the Act. The appellant challenged this decision, providing arguments in support of the interest-free advances made to employees. The Tribunal, after considering the substantial interest-free own funds available to the appellant, overturned the CIT(A)'s decision, emphasizing the presumption in favor of the appellant when interest-free own funds exceed interest-free advances. The Tribunal's decision was based on legal precedents and the specific circumstances of the case, leading to the allowance of the appellant's appeal on this issue. 3. Initiation of Penalty Proceedings: The appellant raised a ground related to the initiation of penalty proceedings, contending that the CIT(A) erred in not adjudicating on this matter. However, the Tribunal did not delve into this issue specifically, deeming it either premature or not requiring specific adjudication. Therefore, the Tribunal's decision did not address the initiation of penalty proceedings, as it was considered either premature or of a general nature not necessitating detailed consideration. In conclusion, the Tribunal allowed the appellant's appeal, primarily focusing on the disallowance of interest on advances issue, which was the central point of contention. The decision was based on a thorough analysis of the facts, legal provisions, and relevant case laws, ultimately leading to a favorable outcome for the appellant.
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