2016 (4) TMI 162 - AT - Income Tax

Disallowance of interest under sec. 36(1)(iii) - Held that - The assessee was having sufficient non-interest bearing funds being shareholder fund (Rs.3,65,72,082 as on 01.04.2010 and ₹ 7,72,68,670 as on 31.3.2011) and since the immediate source of the loan to the director was sale proceeds of the industrial plot, in our view, there was no nexus between the borrowings of the assessee and advances made to the director out of the interest bearing borrowed funds. It is also undisputed fact that all the borrowings were sanctioned in earlier years and the total secured loan outstanding at the end of the year, has been reduced to ₹ 2,75,17,405 as on 31.3.2011 from ₹ 5,09,08,700 as on 01.04.2010, during the year, clearly establishes that all the borrowings for which interest/financial charges has been paid, were for the business purpose only. In view of the above material facts and respectfully following the ratios laid down by the Hon ble jurisdictional High Court of Delhi in the above cited decision in the case of CIT vs. Bharti Tele-venture Ltd.( 2011 (1) TMI 326 - DELHI HIGH COURT ), we hold that the authorities below were not justified in making and upholding the disallowance of interest invoking the provisions of sec. 36(1)(iii) of the Act - Decided in favour of assessee

Summary

Issues:
Disallowance of interest under sec. 36(1)(iii) of the Income-tax Act, 1961.

Analysis:
The assessee challenged the First Appellate Order questioning the disallowance of interest amounting to Rs. 41,65,686 under sec. 36(1)(iii) of the Income-tax Act, 1961. The Assessing Officer disallowed the interest based on the profit and loss account, noting that the assessee paid interest to banks on secured loans while providing interest-free advances to its director. This disallowance was upheld by the Learned CIT(Appeals).

The Learned AR argued that the assessee had its own interest-free funds, which were ignored in the decision-making process. The AR pointed out that the immediate source of the amount given to the director as a loan was from the sale proceeds of the company's investments, not borrowed funds. The AR emphasized that there was no established nexus between the borrowed funds and the specific advance made to the director. Various documents were submitted to support this argument, including audit reports, balance sheets, and bank statements.

The AR distinguished the present case from previous decisions where borrowed funds were used for interest-free loans unrelated to business purposes. The AR cited specific cases to support this argument. On the other hand, the Senior DR supported the decisions of the authorities below.

Upon reviewing the arguments and precedents cited, the Tribunal found that there was no nexus between the borrowings of the assessee and the advances made to the director. The Tribunal noted that the assessee had sufficient non-interest bearing funds and that the immediate source of the loan to the director was not the borrowed funds but sale proceeds. Additionally, the reduction in secured loans during the year indicated that all borrowings were for business purposes. Relying on the decision of the jurisdictional High Court, the Tribunal held that the disallowance of interest was unjustified. Consequently, the Tribunal directed the Assessing Officer to delete the disallowance of interest amounting to Rs. 41,65,686 under sec. 36(1)(iii) of the Act.

In conclusion, the appeal was allowed, and the orders of the authorities below regarding the disallowance of interest were set aside.

This detailed analysis of the judgment addresses the issues involved comprehensively, highlighting the arguments presented by both parties and the Tribunal's reasoning in arriving at its decision.