2019 (5) TMI 1895 - AT - Income Tax

Addition of interest on borrowed funds - proportionate interest on the interest free loan extended to the sister concerns of the assessee - HELD THAT - In the case of the assessee, the assessee s equity share capital, general reserves, accumulated profits and Reserves exceeds the interest free loan extended during the relevant assessment years and the same is not in dispute. Therefore the facts in the case of the assessee are identical to the case decided by the Hon ble Jurisdictional Madras High Court, Hon ble Bombay High Court, and the Chennai Benches of the Tribunal cited herein above. Hence respectfully following the decision of the higher Judiciary we hereby direct the Ld.AO to delete the addition made by disallowing the proportionate interest towards the interest free loan extended for all the relevant assessment years in appeal before us. It is also pertinent to mention that the decision cited by the Ld.DR in the case K.Somasundram Bros 1998 (8) TMI 59 - MADRAS HIGH COURT has no application to the case of the assessee because there is no finding in that case regarding the equity share capital, general reserves, and accumulated profits and Reserves of the assessee company to be in excess of the interest free loan extended. - Decided in favour of assessee.

Summary

Issues:
Disallowance of interest on borrowed funds extended as interest-free loans to sister concerns for assessment years 1997-98, 1998-99, and 2004-05.

Analysis:
1. The assessee appealed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of interest on borrowed funds extended as interest-free loans to sister concerns. The Assessing Officer (AO) disallowed the interest amount for the relevant assessment years. The Tribunal remitted the matter back to the AO to examine the cash flow statement but the AO was not satisfied with the liquidity position of the company based on various balances.

2. The appellant argued that its own funds exceeded the loan amount, and there was no prohibition under the Act to use such funds for business purposes. The appellant contended that the disallowance was not supported by any statutory provision. The Departmental Representative (DR) supported the orders of the Revenue Authorities, emphasizing the need for cash liquidity despite the appellant's own funds exceeding the loan amount.

3. The Tribunal observed that the appellant had consistently used its own funds for business purposes and had extended interest-free loans to sister concerns. The Tribunal cited precedents where interest was allowed if funds were available, whether interest-free or borrowed. The Tribunal highlighted that the appellant's own funds exceeded the interest-free loan amount, following decisions of higher courts and previous Tribunal rulings.

4. The Tribunal emphasized that when funds are mixed, there is a presumption that interest-free loans are sourced from interest-free funds first. The Tribunal directed the AO to delete the disallowance of interest towards interest-free loans for all relevant assessment years, as the appellant's own funds exceeded the loan amount. The Tribunal distinguished the cited case by the DR, as it lacked findings regarding the appellant's own funds exceeding the loan amount.

5. Consequently, the Tribunal allowed the appeals of the assessee, directing the AO to delete the addition made by disallowing the proportionate interest on the interest-free loans extended to sister concerns for all relevant assessment years. The decision was pronounced on May 8, 2019, in Chennai.