2016 (9) TMI 1606 - AT - Income Tax

Disallowance of interest on account of the loan/advances to its three Directors - Whether direct nexus between the advances given to the Directors and the assessee's own fund developed ? - HELD THAT - The contention raised by the revenue that own fund has been utilized for the purpose of fixed assets was not accepted by the Hon'ble High Court and it was held that if there are funds available both interest free and loan then the presumption would arise that the investment would be out of interest free fund generated or available with the company if the interest free fund was sufficient to meet the investment. We are of the view that the judgment in the case of CIT Vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT is applicable in the facts of the present case. Accordingly, following the judgment of Hon'ble Bombay High Court (supra), addition made by the Assessing Officer in question is deleted. Appeal of the assessee is allowed.

Summary

Issues:
Disallowance of interest on loans/advances to directors.

Analysis:
The only issue in this case is whether the disallowance of interest on loans/advances to directors by the CIT (Appeals) is justified. The Assessing Officer disallowed interest on loans amounting to ?1,58,54,874 given to three directors by the assessee. The Assessing Officer calculated a proportionate interest of ?20,62,434 and disallowed it, stating it was not for the business purpose of the assessee. The assessee contended that its own funds were sufficient for the loans to directors, with interest-free funds exceeding ?10 crores. The CIT (Appeals) upheld the disallowance.

The assessee argued that its own funds, including share capital and reserves, amounted to ?10.35 crores, which was more than adequate to cover the loans to directors totaling ?1,58,64,874. The assessee cited the judgment of the Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. to support its position. The assessee claimed that when both own funds and borrowed funds are pooled, it can be presumed that own funds were used for interest-free advances to directors. The Departmental Representative contended that there was no direct nexus shown between the advances to directors and the assessee's own funds.

The Tribunal considered the submissions and the relevant material. It noted that the assessee's own funds were indeed ?10.35 crores, as claimed. Referring to the Bombay High Court judgment, the Tribunal held that if interest-free funds were available and sufficient to meet investments, it could be presumed that investments were made from those funds. Therefore, the Tribunal allowed the appeal, deleting the addition made by the Assessing Officer.

In conclusion, the Tribunal ruled in favor of the assessee, stating that the disallowance of interest on loans/advances to directors was not justified. The judgment relied on the principle that if interest-free funds were adequate to cover investments, it could be presumed that such investments were made from those funds.