2017 (2) TMI 558 - AT - Income Tax

Disallowance u/s 36(1)(iii) on account of the loans and advances given to the relatives interest-free - Held that - The facts could not be disputed by the authorities below as also by the learned Departmental representative that the appellant was having interest-free funds to the extent of ₹ 9,91,01,938 as against which the interest-free loans and advances given to the relatives and directors etc. were only of ₹ 2,07,64,779, which were far below the interest-free funds. The objection of the authorities below that the assessee could not prove a nexus between the availability of interest-free funds and giving of interest-free advances, does not appear to be a requirement of the law inasmuch as it is by now settled that when there are interest-free funds available to the assessee sufficient to meet its investments or loans, it can be presumed that such investments came out of the available interest-free funds and not out of the interest bearing funds/overdraft account. The co- ordinate Bench of the Jaipur Income-tax Appellate Tribunal in the case of Ram Kishan Verma (2012 (6) TMI 534 - ITAT JAIPUR ) held that the assessee was having sufficient capital and there were mixed funds then non-interest bearing funds are to be considered as utilised for non-interest bearing advances. It is the assessee who has to take a business decision. There is no onus on the assessee to establish a nexus. The disallowance under challenge made by the Assessing Officer under section 36(1)(iii) and confirmed by the Commissioner of Income-tax (Appeals) was not justified - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 36(1)(iii) of the Income-tax Act, 1961.
2. Availability of sufficient interest-free funds.
3. Utilization of loans for business purposes.
4. Consistency in treatment of similar disallowances in past years.
5. Distinguishing the cases cited by the Revenue.

Detailed Analysis:

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

The assessee challenged the disallowance of ?13,15,762 made by the Assessing Officer (AO) under Section 36(1)(iii) of the Income-tax Act, 1961. The AO had disallowed this amount on the grounds that the assessee provided interest-free loans and advances to relatives and directors despite having borrowed funds on which interest was paid. The AO applied an average interest rate of 12.84% on the interest-free loans and advances amounting to ?2,07,64,779.

2. Availability of Sufficient Interest-Free Funds:

The assessee argued that it had sufficient interest-free funds amounting to ?9,91,01,938, which were significantly higher than the interest-free loans and advances given. The assessee provided detailed submissions and balance-sheet evidence to support this claim. The legal principle established in various judgments, including CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom), was cited, which states that if there are sufficient interest-free funds available, it can be presumed that the interest-free advances were made from these funds and not from borrowed funds.

3. Utilization of Loans for Business Purposes:

The assessee contended that the credit facilities obtained were solely used for business purposes, and the interest on bank loans was fully allowable under Section 36(1)(iii). The assessee also pointed out that the credit facilities were against the hypothecation of raw materials and stores, further establishing their business use. The Commissioner of Income-tax (Appeals) had argued that the interest-free loans were not given for business purposes, but the assessee countered that such a consideration was irrelevant when sufficient interest-free funds were available.

4. Consistency in Treatment of Similar Disallowances in Past Years:

The assessee highlighted that in previous years, similar interest-free loans and advances were made, and no disallowance was made by the tax authorities. The principle of consistency was emphasized, referencing CIT v. Sridev Enterprises [1991] 192 ITR 165 (Karn) and CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC), which support consistent treatment of similar facts across different assessment years.

5. Distinguishing the Cases Cited by the Revenue:

The assessee argued that the cases cited by the AO, such as CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H), were distinguishable as they were decided in different factual contexts. The case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) was also noted, but the assessee pointed out that this case dealt with interest-bearing funds being used for interest-free advances, which was not applicable in their situation where sufficient interest-free funds were available.

Conclusion:

The Tribunal concluded that the disallowance made under Section 36(1)(iii) was not justified. It was held that when sufficient interest-free funds are available, it can be presumed that interest-free advances are made from these funds. The Tribunal referenced multiple judgments supporting this view, including CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) and Hero Cycles P. Ltd. v. CIT [2015] 379 ITR 347 (SC). The Tribunal also noted that similar disallowances were not made in previous years, reinforcing the principle of consistency. Consequently, the appeal of the assessee was allowed, and the disallowance was deleted.