2020 (7) TMI 764 - AT - Income Tax

Disallowance of interest - advance was paid out of interest-free funds comprising Reserves Surplus of the company - why proportionate interest u/s 36(1)(iii) of the Act should not be disallowed as there seems to be no business connection between the advance paid and the business of assessee? - HELD THAT - The undisputed facts are that the assessee has sufficient interest-free funds available with it as it is a listed company and has huge funds available with it. Even during the year, assessee has earned profit - Therefore, we are not in a position to concur with the conclusions drawn either by the CIT(A) or the Assessing Officer on this issue. The tax authorities cannot be allowed to sit on the chair of a businessman and decide what is right or wrong for the business. In this case, we note that the assessee s own funds are far more than the advance paid for booking of bungalow as is clear from the facts given hereinabove. Therefore both the authorities below have grossly erred while deciding the issue. The case of assessee is squarely covered by the decision in the case of CIT vs Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT wherein has confirmed the order of PHALTON SUGAR WORKS LIMITED VERSUS COMMISSIONER OF WEALTH-TAX 1993 (8) TMI 41 - BOMBAY HIGH COURT upholding the order of Tribunal wherein it has been held that where interest-free funds available with assessee were sufficient to meet the investments, it could be presumed that the investment was made from interest-free funds available with the assessee. We, therefore, respectfully following the same, set-aside the order of ld. CIT(A) and direct the Assessing Officer to delete the disallowance - Appeal of assessee is allowed.

Summary

Issues:
Confirmation of disallowance of interest under Section 36(1)(iii) of the Act by the CIT(A).

Analysis:
The appeal was against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of interest of ?5,61,702 by the Assessing Officer under Section 36(1)(iii) of the Act for the assessment year 2014-15. The Assessing Officer noted that the assessee had given an advance for booking a bungalow at Nagpur and issued a show-cause notice as there seemed to be no business connection between the advance paid and the business of the assessee. The assessee contended that the advance was paid out of interest-free funds comprising Reserves & Surplus of the company. However, both the Assessing Officer and the CIT(A) upheld the disallowance, stating that the business purpose of the advance had not been explained adequately.

In the appellate proceedings, the CIT(A) dismissed the appeal by emphasizing that the business purpose of buying the bungalow at Nagpur was not clarified by the assessee. The CIT(A) agreed with the Assessing Officer that the availability of interest-free funds was not the main issue, but rather whether the expenditure was for business purposes. The CIT(A) highlighted that the businessman has a legal obligation to spend money for the benefits and furtherance of the existing business. Therefore, the disallowance made by the Assessing Officer was confirmed by the CIT(A).

Upon hearing the submissions and reviewing the facts, the ITAT Mumbai observed that the assessee, being a listed company, had sufficient interest-free funds and had earned a substantial profit during the year. The ITAT disagreed with the conclusions of both the CIT(A) and the Assessing Officer, stating that the tax authorities cannot dictate what is right or wrong for the business. The ITAT referenced a decision of the Supreme Court which upheld that where interest-free funds were adequate to meet investments, it could be presumed that the investment was made from such funds. Consequently, the ITAT set aside the order of the CIT(A) and directed the Assessing Officer to delete the disallowance of interest.

In conclusion, the appeal of the assessee was allowed, and the ITAT ordered the deletion of the disallowance of interest under Section 36(1)(iii) of the Act.