2018 (8) TMI 2116 - AT - Income Tax

Addition u/s 36(1)(iii) - Non-charging of interest on loans from the related parties - as per AO Assessee has diverted its interest bearing funds as loans and advances to sister concerns and others without charging of any interest - HELD THAT - It is an admitted fact that nothing has been brought on record that any specific interest bearing borrowed funds has been diverted by the assessee to the related parties from whom no interest has been charged. Since the net owned funds of the assessee company in the instant case is much more than the interest free advances given to related parties and since the Revenue has not brought on record any specific instance of interest bearing borrowed funds being diverted to the related parties free of interest, thus no disallowance u/s 36(1)(iii) is called for. As in the case of CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest free funds generated or available with the assessee company, if the interest free funds were sufficient to meet the investment. Appeal filed by the assessee is allowed.

Summary

Issues:
Addition of interest on loans from related parties.

Analysis:
The appeal was against the order of the CIT(A) sustaining the addition of Rs.5,39,940/- due to non-charging of interest on loans from related parties. The Assessing Officer observed discrepancies in the interest charged on loans and advances received by the assessee, leading to the addition. The assessee explained the advances were business-related, but failed to provide sufficient justification or confirmations for not charging interest. The CIT(A) upheld the addition citing lack of relevant details furnished by the assessee, emphasizing the need to justify capital outlay for business purposes. The Tribunal was approached by the assessee challenging the CIT(A)'s decision.

The counsel for the assessee argued that since the owned funds exceeded the interest-free advances, no disallowance should be made. Citing various legal precedents, the counsel contended that when owned funds surpass interest-free advances, disallowance under section 36(1)(iii) is unwarranted. The Tribunal noted the absence of evidence showing diversion of interest-bearing funds to related parties without charging interest. Relying on the principle that investments are presumed to be from interest-free funds if available, the Tribunal held that no disallowance was justified. The Tribunal emphasized that if owned funds exceed interest-free advances and no evidence of diversion exists, section 36(1)(iii) does not apply. Consequently, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to delete the addition.

In conclusion, the Tribunal allowed the appeal, highlighting the importance of demonstrating the source of funds for investments and the inapplicability of disallowance when owned funds exceed interest-free advances. The decision emphasized the need for clear justification and evidence in cases involving interest on loans from related parties to avoid unwarranted additions.