2018 (10) TMI 1030 - AT - Income Tax

Addition u/s 36(1)(iii) - Held that - After perusing the record before us including balance sheet and loan & advances, we observe that assessee s own funds in the form of share capital and reserves are ₹ 2.81 crores whereas the advances to the staff were only to the tune of ₹ 57.58lacs and therefore there is no justification for the AO to make the addition u/s 36(1)(iii) of the Act as no disallowance is required to be made on this count. Case of the assessee is squarely covered by the decisions in the case of HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT) and Reliance Utilities & Power Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT). - Decided in favour of assessee.

Summary

Issues:
Rectification/recalling of the order due to non-adjudication of Ground No. 2 and 3 regarding the deletion of disallowance of interest on interest-free advances given by the company to its staff under section 36(1)(iii) of the Act.

Analysis:
The Appellate Tribunal received a miscellaneous application from the revenue seeking rectification/recalling of the order passed for assessment year 2011-12 due to an apparent mistake. The issue revolved around Ground No. 2 and 3, which were inadvertently left out from being adjudicated. The revenue argued that the non-adjudication of these grounds was a mistake and should be rectified or recalled. On the other hand, the respondent conceded that Ground No. 2 and 3 were not adjudicated and needed rectification. The only issue involved in both grounds was the deletion of disallowance of interest on interest-free advances given to staff, as per section 36(1)(iii) of the Act.

The revenue contended that any interest paid in respect of capital borrowed for business purposes is deductible only if the borrowed funds are used for business and continue as such. The respondent argued that since the company's own funds far exceeded the advances given to staff, there was no justification for disallowance under section 36(1)(iii) of the Act. The Tribunal examined the balance sheet and loan details, noting that the company's own funds were significantly higher than the advances to staff, justifying the deletion of the disallowance.

Based on the arguments and evidence presented, the Tribunal found that the revenue's grounds for non-adjudication were unfounded. Citing relevant case law, including decisions by the jurisdictional high court, the Tribunal decided in favor of the respondent, dismissing the miscellaneous application filed by the revenue. Consequently, the impugned order of the Tribunal was modified to reflect the decision on Ground No. 2 and 3, upholding the deletion of disallowance of interest on staff advances. The order was pronounced in open court on 16.10.2018.