2019 (5) TMI 2000 - AT - Income Tax

Disallowance of interest expenses - said interest related to borrowed fund, which were not used for business purpose - assessee has given interest free advances to its sister concern - HELD THAT - We have also carefully considered the order passed by the Learned Tribunal for A.Y. 2010-11 2011-12 in assessee s own case once an assessee demonstrated that on a particular date of accounting period it has availed interest free funds and it wants to characterize it as interest free advance out of this interest free fund, then the ld.AO cannot assume interest income by merely observing that loans were given before availability of interest free funds. Assessee has been showing excess interest free funds. Out of which it could be assumed that these advances were made. This plea of the assessee cannot be rejected merely by observing that loans were given before 1.4.2006. There is no logic in the stand point of the CIT(A). Every year is an independent assessment year and even if the assessee has been charging interest on the advances given by him, but after a particular date, it can stop charging interest by treating the advance as given from interest free funds. In the present case, the assessee has demonstrated that it is having sufficient interest free funds out of which the loans given even in earlier years can be characterized as given in the present year. Accordingly, we allow his ground of appeal and delete the disallowance. Assessee appeal allowed.

Summary

Issues:
1. Disallowance of interest expenses on borrowed funds not used for business purpose.
2. Similar issue dealt with in previous assessment years.
3. Availability of interest-free funds to cover advances.

Analysis:
1. The appellant, a private limited company engaged in manufacturing household plastic and oral care products, filed an appeal against the disallowance of interest expenses amounting to Rs.4,61,419/- by the Assessing Officer (AO). The disallowance was based on the grounds that the interest related to borrowed funds was not utilized for business purposes. The Commissioner of Income Tax (Appeals) upheld the disallowance, leading to the appeal before the ITAT. The appellant had given interest-free advances to its sister concern from borrowed funds, intending for commercial purposes and had sufficient interest-free funds to cover the advances. The ITAT considered a similar issue in the appellant's previous case for AY 2011-12 and decided in favor of the appellant, deleting the disallowance.

2. The appellant's counsel highlighted that similar disallowances were made in previous assessment years, 2007-08 and 2008-09, where the Tribunal upheld the deletion of disallowance. The Tribunal's order in those years supported the appellant's position that the advances were made from interest-free funds available with the appellant. The ITAT reviewed the records and observed that the appellant had substantial interest-free funds, including share capital, reserves, and surplus, along with interest-free deposits. The ITAT disagreed with the CIT(A)'s reasoning that the loans were given before the availability of interest-free funds, stating that each assessment year should be considered independently. The ITAT allowed the appeal and deleted the disallowance, relying on the appellant's demonstration of having sufficient interest-free funds to cover the advances.

3. The ITAT, in line with a previous judgment by a co-ordinate bench, found no justification for the disallowance made by the lower authorities. The ITAT emphasized the appellant's ability to demonstrate the availability of interest-free funds to support the advances made. Consequently, the ITAT allowed the appeal, overturning the disallowance of interest expenses on borrowed funds not used for business purposes. The ITAT's decision was based on the appellant's consistent showing of having adequate interest-free funds to cover the advances, thereby rejecting the lower authorities' addition.