2009 (1) TMI 4 - HC - Income Tax

Interest on borrowed funds - disallowance of interest - Revenue contend that the shareholders funds were utilised for the purpose of fixed assets (investments) - C.I.T. (A) & ITAT have given a clear finding that the assessee had interest free funds of its own - Apart from that in terms of the balance sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital - finding of fact recorded by C.I.T. (A) and I.T.A.T. cannot be faulted additions not justified

Summary

Issues:
1. Justification of holding that the Assessee Company had sufficient funds for investments without using interest-bearing funds.
2. Whether advances to sister concerns were for business purposes.

Issue 1:
The main issue was whether the Assessee Company had enough funds of its own for investments without utilizing interest-bearing funds. The Assessing Officer disallowed interest amounting to Rs.4.40 crores, calculated at 12% per annum for three months, as he found that a portion of the investments was made from borrowed funds. The Assessee contended that they had invested in companies in the energy sector to build long-term business prospects and had enough interest-free funds for the investments. The C.I.T.(Appeals) agreed with the Assessee, deleted the addition made by the Assessing Officer, and directed to allow the same under Section 36(1)(iii) of the Income Tax Act. The Tribunal upheld the C.I.T.(Appeals) order, stating that the Assessee had sufficient funds of its own for investments without using interest-bearing funds. The court found no fault with this decision, as the Assessee had generated interest-free funds and had enough funds available for the investments.

Issue 2:
The second issue revolved around whether advances to sister concerns were for business purposes. The Revenue contended that the advances were made using borrowed funds and were not for business purposes, thus justifying the disallowance of interest by the Assessing Officer. However, the Assessee argued that they had total interest-free funds of Rs.398 crores and had made the investments for business purposes. The court noted that a clear finding was recorded by the C.I.T.(Appeals) and the Tribunal that the Assessee had interest-free funds of its own and had generated funds during the relevant year. The court cited previous judgments to support the view that if there are both interest-free funds and loans available, investments can be presumed to be made from interest-free funds if they are sufficient to cover the investments. In this case, the presumption was established, and the court found no merit in the Revenue's appeal, dismissing it accordingly.

In conclusion, the court upheld the decisions of the C.I.T.(Appeals) and the Tribunal, ruling in favor of the Assessee on both issues. The court found that the Assessee had sufficient interest-free funds for investments and that the investments made were for business purposes, leading to the dismissal of the Revenue's appeal.