2016 (7) TMI 845 - AT - Income Tax

Proportionate dis allowance of interest u/s 36(1)(iii) - investment standing as share application money in various related concerns by treating the same as amount used for non- business purpose - Held that - We hold that the impugned advance has been made out of interest free funds available with the assessee and there was no question of whatsoever for disallowing interest 36(1)(iii) of the Act. Accordingly, we hold that the disallowance of interest u/s 36(1)(iii) pertaining to the sister concerns upheld by the ld. CIT(A) is not justified, hence, the same is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of proportionate interest under Section 36(1)(iii) of the Income Tax Act.
2. Applicability of the judgment in CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1.
3. Consideration of interest-free funds used for investments.

Issue-wise Detailed Analysis:

1. Disallowance of Proportionate Interest under Section 36(1)(iii):
The primary issue in this case was the disallowance of ?3,71,68,025/- claimed as bank interest under Section 36(1)(iii) of the Income Tax Act. The Assessing Officer (AO) disallowed this interest, asserting that the funds were used for non-business purposes, specifically as share application money in related concerns. The AO observed that the assessee had significant investments in related concerns and had not received any interest from these investments. The AO concluded that the funds used for these investments were borrowed, thus justifying the disallowance of interest expenditure.

2. Applicability of the Judgment in CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1:
The CIT(A) upheld the AO's decision, relying on the precedent set by the Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. The CIT(A) emphasized that the assessee failed to demonstrate any business purpose for the investments in related concerns. The CIT(A) maintained that the funds used for these investments were from interest-bearing sources, thereby justifying the disallowance under Section 36(1)(iii).

3. Consideration of Interest-Free Funds Used for Investments:
The assessee contended that the investments were made from interest-free funds, including capital reserves and surplus, and not from borrowed funds. The assessee argued that it had sufficient interest-free funds amounting to ?1,54,61,17,159/- against the advances of ?1,49,36,11,300/-. The assessee also highlighted that it had business dealings with the sister concerns and that the advances were given for commercial expediency. The assessee cited various judgments, including those from the Punjab & Haryana High Court and the Supreme Court, to support its claim that the disallowance was unwarranted.

Judgment:
The Tribunal found merit in the assessee's arguments. It noted that the reliance on the judgment of Abhishek Industries by the lower authorities was misplaced, as this judgment had been overruled by the Supreme Court in the case of Hero Cycles (379 ITR 347). The Tribunal also referred to the judgment of the Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd., which had been reversed, supporting the assessee's position on commercial expediency and the use of interest-free funds.

The Tribunal concluded that the assessee had sufficient interest-free funds and that the advances to sister concerns were for business purposes. Consequently, the disallowance of interest under Section 36(1)(iii) was deemed unjustified and was deleted. The appeal of the assessee was allowed.

Order Pronounced:
The order was pronounced in the open court on 13/06/2016, allowing the appeal of the assessee.