2020 (6) TMI 831 - AT - Income Tax

Disallowance of Interest Expenses u/s 36(1)(iii) - interest free advances to the Appellant's sister concern - AO has alleged that the said advances have been made for non-business purposes and consequently, interest incurred thereon cannot be claimed as deduction - HELD THAT - CIT(A), in first appeal, has confirmed the aforesaid action of disallowance by AO placing reliance on the order of the CIT(A) on similar facts concerning AY 2011-12 but the disallowance made by the Revenue authorities on similar facts has been reversed by the ITAT for the same assessee. Similar reversal of disallowance was stated to have been done by the co-ordinate bench 2019 (5) TMI 2000 - ITAT AHMEDABAD concerning AY 2013-14. Also as pointed out on behalf of the assessee that interest free funds in the form of capital/reserves etc. is substantially in excess of the interest free advances given by the assessee. The interest free capital and reserves are stated to be in the vicinity of Rs.26 Crores as against the interest free advance of Rs.31 Lakhs in question. It was thus claimed that in the instant case, interest free funds available at the disposal of assessee are sufficient to meet the interest free advances and thus a presumption would arise that interest free advances were lent from interest free funds and not borrowed funds. In view of the decision of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and similar approach adopted by the co-ordinate bench in earlier years, we find sufficient reasons to admit the claim of the assessee for reversal of disallowance favourably. Decided in favour of assessee.

Summary

Issues Involved:
Disallowance u/s 36(1)(iii) - Interest Expenses

Detailed Analysis:

Issue: Disallowance u/s 36(1)(iii) - Interest Expenses

The appeal was filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of Interest Expenses of Rs. 3,72,000 under section 36(1)(iii) of the Income Tax Act, 1961, for the assessment year 2014-15. The Assessee contended that the interest expenditure was incurred on interest-free advances to a sister concern for business purposes and with a clear commercial purpose. The Assessing Officer alleged that the advances were made for non-business purposes, leading to the disallowance of the interest expenses. The CIT(A) upheld the disallowance, relying on a previous order for a different assessment year. However, the Assessee argued that similar disallowances were reversed by the ITAT for other assessment years, emphasizing that the interest-free funds available to the Assessee were sufficient to cover the advances. The Assessee claimed that the interest-free funds substantially exceeded the interest-free advances, justifying the deduction of interest expenses.

The ITAT, after considering the submissions and the precedents, found merit in the Assessee's claim for the reversal of the disallowance. Citing the decision of the Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd., and consistent rulings by the co-ordinate bench in previous years, the ITAT admitted the Assessee's claim favorably. The ITAT concluded that the interest-free funds available to the Assessee were significant compared to the interest-free advances, indicating that the advances were likely made from the interest-free funds and not borrowed funds. Consequently, the ITAT allowed the appeal of the Assessee, overturning the disallowance of interest expenses under section 36(1)(iii) for the assessment year 2014-15.

In conclusion, the ITAT's decision favored the Assessee by allowing the appeal and reversing the disallowance of interest expenses under section 36(1)(iii) for the assessment year 2014-15, based on the sufficient availability of interest-free funds compared to the advances made to the sister concern for business purposes.