2017 (1) TMI 770 - AT - Income Tax

Interest free advances to the sister concern - disallowance of interest - Held that - The assessee has un-secured loan amounting to ₹ 5.1 crores as at the end of the previous year relevant to assessment year under consideration. The assessee has paid interest on bank charges at ₹ 69.29 lakhs. We further find that the interest free advances given to sister concern have no business link with the assessee company. The claim of the ld. Authorized Representative of the assessee that the assessee had capital reserves to the tune of ₹ 6.3 crores, hence, non-interest bearing loan, were deemed to have been utilized from the said funds, is also not found acceptable on the ground that the assessee company took a loan for the first time under C.C. account of ₹ 2.16 crores and term loan of ₹ 2.56 crores from the Bank of Baroda, during the financial year 2005-06 out of which the assessee has extended the advance to the aforesaid sister concern during the financial year 2005-06 also. This proves that the assessee needed such a huge bank loan, because share capital, reserve and profits of the Company, which stood at ₹ 8.44 crores as on 31.03.2010. Therefore, we are of the considered opinion that capital reserve standing at ₹ 6.38 crores as on 31.03.2010 stands already utilized towards investment in fixed assets. Hence, there was no surplus funds available with the assessee for making interest free advances to the sister concern. Hence, the proportionate disallowance of interest of ₹ 30.80 lakhs on advance of ₹ 2.20 crores is upheld. - Decided against assessee

Summary

Issues Involved:
- Disallowance of interest payment on borrowed funds for non-business purposes.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income-tax (Appeals) pertaining to the assessment year 2010-11. The primary issue was the disallowance of ?30,80,000 out of interest payment on the grounds of borrowed funds being utilized for non-business purposes.

2. The Assessing Officer (AO) noted that the company had shown advances in the balance sheet and claimed a significant amount as interest and bank charges. The AO inferred that the company borrowed loans for business needs, impacting its profit margin. The AO disallowed a proportionate interest of ?30.80 lakhs on the advances and added it to the total income.

3. The Commissioner of Income-tax (Appeals) upheld the disallowance, stating that the advances were not for business purposes and did not help in business expansion. The Commissioner relied on previous judgments and case laws to support the decision.

4. The Tribunal considered the arguments presented by the assessee, who claimed that the advances were given to sister concerns for business expansion. However, the Tribunal found no business link between the advances and the company. The Tribunal also rejected the argument that non-interest bearing loans were utilized from capital reserves, as the company had taken significant bank loans, indicating a lack of surplus funds for interest-free advances.

5. Ultimately, the Tribunal upheld the disallowance of ?30.80 lakhs on the advances of ?2.20 crores, dismissing all grounds of appeal. The case laws relied upon by the assessee were deemed not applicable to the specific circumstances of this case. Consequently, the appeal was dismissed.

In conclusion, the Tribunal affirmed the disallowance of interest payment on borrowed funds for non-business purposes, based on the lack of a business link between the advances and the company, as well as the utilization of significant bank loans indicating a lack of surplus funds for interest-free advances.