2018 (4) TMI 518 - AT - Income Tax

Disallowance of interest u/s. 36(1)(iii) - advancement of loans - Held that - The company has advanced a loan of Rs. ,04,05,929/- and tax of ₹ 32,70,298/- has been deducted on source. These details were available before the AO and he proceeded to make the disallowance of interest of ₹ 1,35,00,000/- brushing aside the crucial evidences placed on record. In view of all and then material on record, hence, the AO was rightly directed by the ld. CIT(A) to delete the disallowance of interest of ₹ 1,35,00,000/- made by the AO u/s. 36(1)(iii) of the Act, which does not need any interference on our part - Decided against revenue

Summary

Issues:
Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961 for assessment year 2010-11.

Analysis:
The Revenue appealed against the Order of the Ld. CIT(A)-3, New Delhi, challenging the deletion of the disallowance of interest of ?1,35,00,000/- made by the AO under section 36(1)(iii) of the Act. The AO disallowed the interest as the assessee had borrowed money from group companies and then provided loans to them at a lesser rate of interest. The AO held that the interest cost on interest-free advances and investments was not allowable under section 36(1)(iii). The Ld. CIT(A) allowed the appeal of the assessee by deleting the addition. The Revenue contended that the Ld. CIT(A) erred in deleting the disallowance and requested to uphold the addition.

The Ld. CIT(A) based his decision on the principle of consistency and various judicial pronouncements. He noted that the assessee's investments in subsidiary and joint venture companies were in line with its main objectives as per the memorandum and articles of association. The Ld. CIT(A) referred to judicial precedents such as India Cement Ltd. vs. CIT and SA Builders Ltd. vs. CIT to support his decision. The Ld. CIT(A) concluded that the expenditure on business investments in the form of interest was allowable under section 36(1)(iii) as it was incurred wholly and exclusively for business purposes.

The ITAT, 'B' Bench New Delhi for AY 2009-10 confirmed the order of the CIT(XIII), New Delhi in the assessee's case. The Ld. DR failed to provide any contrary decisions from higher courts. The Tribunal noted that the Ld. CIT(A) followed the decision of the Ld. CIT(A)-XIII in AY 2009-10, which was directly applicable to the current case. The Tribunal found that the AO disregarded crucial evidence regarding loans advanced and tax deducted at source, leading to the deletion of the disallowance of interest. The Tribunal upheld the Ld. CIT(A)'s order and dismissed the Revenue's appeal.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s decision to delete the disallowance of interest under section 36(1)(iii) for the assessment year 2010-11. The appeal filed by the Revenue was dismissed, and the order was pronounced on 09/04/2018.