2017 (3) TMI 1160 - HC - Income Tax

Disallowance of interest on borrowed - Held that - Addition on account of interest upto the date of search was deleted by CIT(A) on the ground that no interest bearing funds were utilised for making any interest free loans/advances to various parties and hence, no interest should be disallowed in the year in question, but A.A. has discarded aforesaid deletion made by CIT (A) only on the ground that department has not accepted decision of CIT (A). So long as CIT (A) s order is not upset, it was not open to A.A. to ignore the same. Therefore, addition made by him was apparently illegal. - Decided in favour of assessee.

Summary

Issues:
Appeal under Section 260-A of Income Tax Act, 1961; Disallowance of interest on borrowed amount of ?3,25,03,000.00.

Analysis:
The appeal arose from a judgment by the Income Tax Appellate Tribunal regarding the disallowance of interest on a borrowed amount for the Assessment Year 2002-03. The appellant framed five substantial questions of law, but the Court admitted the appeal based on only one question related to the disallowance of interest. The Assessing Authority had disallowed interest on borrowed funds due to interest-free loans advanced to parties without business transactions. The total expenditure on interest payment during the year was ?169.42 crores, with an average interest rate of 12.5%. The Commissioner of Income Tax (Appeals) had deleted the addition of ?3,25,03,000.00, stating that no interest-bearing funds were utilized for interest-free loans. The Tribunal upheld this view, citing past decisions and confirming that no disallowance was warranted if non-interest bearing funds were used for interest-free advances.

The Court found that the Assessing Authority's addition of interest was illegal as it disregarded the decision of the Commissioner of Income Tax (Appeals) without valid reasons. The Commissioner had established that no interest-bearing funds were used for the interest-free loans, which the Assessing Authority failed to acknowledge. The Tribunal had previously upheld similar decisions, emphasizing the importance of utilizing non-interest bearing funds for interest-free advances. The Court affirmed the Tribunal's decision, noting the consistency in facts between previous assessment years and the current one. Consequently, the Court dismissed the appeal, ruling in favor of the assessee based on the established principles and precedents.