2016 (4) TMI 564 - AT - Income Tax

Disallowance u/s.36(1)(iii) - Held that - Amount borrowed for the purpose of business was partly disallowed by the AO on the plea that interest cannot be allowed to the extent of interest free advances/loans. As per the details furnished before the lower authorities we found that advances were made in the regular course of business for purchase of property which cannot be treated as not related to the business. Further we found that the reserve and surplus of assessee company was much more higher than the alleged advances on which the AO has disallowed the interest. In view of the jurisdictional High Court decision in the case of Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ) wherein it was held that where the assessee has own and borrowed funds a presumption can be made that advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose. Applying the proposition of law laid down by the jurisdictional High Court we do not find any merit in the disallowance so made by the AO u/s.36(1)(iii) of the I.T.Act where reserves and surplus of assessee was much more than the advances. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of bad debts of Rs. 10 crores.
2. Disallowance of interest under section 36(1)(iii) of Rs. 6,53,567.

Issue-Wise Detailed Analysis:

1. Disallowance of Bad Debts of Rs. 10 Crores:

The assessee, engaged in real estate development, trading in TDR, and finance, advanced Rs. 10 crores to M/s C. Bhansali Developers Pvt Ltd. for reserving commercial premises. The project did not materialize, and the amount was written off as bad debt. The Assessing Officer (AO) disallowed the claim under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, stating that the assessee was not engaged in money lending and the amount was not an income of the assessee.

The CIT(A) upheld the AO's decision, noting that the assessee did not have a money lending license or NBFC license. The CIT(A) also rejected the alternative claim under Section 37, stating that the bad debt claim fell under sections 30 to 36 of the Act.

Upon appeal, the Tribunal examined the Memorandum of Association, which included real estate and money lending as business activities. The Tribunal noted that the interest income from lending was treated as business income by the AO. The Tribunal found that the advance was made in the ordinary course of business and was irrecoverable, thus qualifying as a business loss under Section 28/37 of the Act. The Tribunal cited various judicial precedents supporting the claim that non-recoverable advances made in the ordinary course of business are allowable as business losses. The Tribunal directed the AO to allow the claim of Rs. 10 crores as a business loss under Section 28/37 of the Act.

2. Disallowance of Interest under Section 36(1)(iii) of Rs. 6,53,567:

The AO disallowed Rs. 6,53,567, claiming the assessee diverted interest-bearing funds for non-business purposes. The assessee contended that the advances were for purchasing property, a regular business activity, and were made from reserves and surplus, not borrowed funds. The Tribunal referred to the jurisdictional High Court's decision in Reliance Utilities & Power Ltd., which presumes that advances for non-business purposes are made from own funds if reserves exceed the advances.

The Tribunal found that the advances were indeed related to the business and the reserves and surplus were higher than the advances. Therefore, the disallowance under Section 36(1)(iii) was not justified. The Tribunal directed the AO to delete the disallowance.

Conclusion:

The Tribunal allowed the appeal, directing the AO to:
1. Allow the bad debt claim of Rs. 10 crores as a business loss under Section 28/37.
2. Delete the disallowance of Rs. 6,53,567 under Section 36(1)(iii).

Order Pronounced: The appeal of the assessee is allowed as per the order pronounced in the open court on 04/03/2016.

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