2018 (5) TMI 1083 - AT - Income Tax

Addition u/s. 36(1)(iii) - interest free loans / advances to sister concerns - Held that - We note that the advance in dispute were given to the sister concerns as on 31.3.2011 and 31.3.2012 and the audited balance sheet for the year ending 31.3.2011 and 31.3.2012 exhibits that the assessee has sufficient interest free funds (own funds / interest free loan/sundry creditors) to provide loan / advance to sister concerns. We note that as on 31.3.2011 the assessee has given interest free advances to sister concern amounting to ₹ 1,98,64,866.85 out of own funds amounting to ₹ 38,01,36,440.98 which is far in excess of advances to sister concerns. We further note that assessee has given fresh advances amounting to ₹ 48,50,000/- to M/s SK Enterprises & ₹ 14,50,000/- to M/s Pride Sales Corporation (Totaling ₹ 63,00,000/-) during the impugned AY 2012-13 out of own funds amounting to ₹ 18,60,06,299.47 (Rs. 18.60 cr.) which too is far in excess of advances to sister concerns and the interest free advances are from own funds as the loan amount as on 31.3.2012 has been reduced by ₹ 11,34,102/-. On going through the AO s assessment order in assessee s own case for the preceding year i.e. AY 2011-12 it was noted that no addition u/s. 36(1)(iii) has been made in the assessment passed u/s. 143(3) of the Act and also on perusal of the CIT(A) s order in AY 2013-14, we note that Ld. CIT(A) Rohtak vide his order dated 11.4.2017 has allowed the assessee s appeal for the succeeding assessment year i.e. AY 2013-14, on the same issue of Section 36(1)(iii) relating to same parties considering assessee s submissions. Following the principle of consistency, the addition in dispute is deleted. - Decided in favour of assessee. Addition on account of telephone expense we note that no specific finding has been made to indicate that the expenses incurred could have been of a personal nature, therefore, we delete the same. - Decided in favour of assessee.

Summary

Issues:
Challenge to disallowance under section 36(1)(iii) at an arbitrary rate, Disallowance of interest on advances to related parties, Consideration of additional evidences, Excessive disallowance for personal usage.

Issue 1: Challenge to disallowance under section 36(1)(iii) at an arbitrary rate
The appellant challenged the disallowance under section 36(1)(iii) at an arbitrary rate of 13.25% amounting to ?37,17,140, arguing that it did not meet the test of nexus, purpose, and commercial expediency. The AO considered the advances to related parties as loans and disallowed the interest, citing non-business purposes. The AO computed the interest at 13.25% on daily outstanding balances. The CIT(A) partly allowed the appeal but upheld the disallowance. The Tribunal noted the appellant's submissions regarding sufficient interest-free funds and previous assessments without disallowances. Relying on case laws and consistency principles, the Tribunal deleted the disallowance of ?37,17,140.

Issue 2: Disallowance of interest on advances to related parties
The AO disallowed interest on advances to related parties, considering them as loans for non-business purposes. The appellant argued that the advances were from interest-free funds and cited previous assessments without disallowances. The Tribunal noted the appellant's financial position, fresh advances made, and reductions in loan amounts. Consistency with previous assessments and case laws led the Tribunal to delete the disallowance of ?37,17,140.

Issue 3: Consideration of additional evidences
The appellant contested the non-consideration of additional evidences, claiming they contained material particulars for the case. The AO treated the advances as loans to related parties for non-business purposes. The Tribunal, while considering the appellant's financial position and consistency in assessments, found no grounds for disallowance under section 36(1)(iii) and deleted the amount of ?37,17,140.

Issue 4: Excessive disallowance for personal usage
The AO made an excessive disallowance of ?13,779 for personal usage, which the appellant challenged as unreasonable. The CIT(A) restricted the addition to ?13,799. The Tribunal found no specific finding indicating personal nature expenses and thus deleted the addition. The appeal was allowed in favor of the Assessee.

In conclusion, the Tribunal ruled in favor of the Assessee, deleting the disallowance under section 36(1)(iii) and the addition for personal usage, emphasizing the importance of financial position, consistency in assessments, and adherence to legal principles and case laws.