2019 (1) TMI 931 - AT - Income Tax

Addition u/s 36.(i)(iii) - assessee has diverted its interest bearing funds to the sister / associate concerns without any business consideration or commercial expediency - CIT(A) has deleted the addition - Held that - No opportunity was given to the appellant in the course of assessment proceedings before making the disallowance on this issue. Further, I find that contentions of the appellant with regard to the availability of interest-free funds are correct as is seen from the financial statements that share capital including share premium of ₹ 82.50 crore was raised in the preceding year and interest-free loans and advances of ₹ 60.61 crore has been given to the related party in the current year. The appellant has explained that share capital and free reserves & surplus amounting to ₹ 109.19 crore were available as on 31/03/2012 and therefore, the question of transfer of interest bearing funds does not arise. We find that the decision of the Ld. CIT(A) is based on the relevant facts pertaining to the financial position of the assessee after duly analyzing the availability of own funds and taking into consideration the orders of the Tribunal, judgments of the jurisdictional High Court. Interfering or altering in the well reasoned order of the Ld. CIT(A) would only disturb the settled position of law in force and hence the order of the Ld. CIT(A) is hereby confirmed. - decided against revenue

Summary

Issues:
1. Disallowance of interest expenditure under section 36(i)(iii) of the Income Tax Act, 1961.
2. Allowance of interest under section 36(i)(iii) of the Income Tax Act, 1961 for non-business purposes.

Analysis:

Issue 1: Disallowance of interest expenditure under section 36(i)(iii) of the Income Tax Act, 1961:
The Assessing Officer disallowed the interest expenditure of ?7,18,09,666 debited to the Profit and Loss Account, alleging that the assessee diverted interest-bearing funds to related concerns without business consideration. The AO relied on the Punjab and Haryana High Court decision in Abhishek Industries. The appellant contended that the disallowance was unjustified as no opportunity to explain was provided, and the interest claimed was for specific purposes, not related to advances to related entities. The appellant highlighted the increase in share capital and premium, demonstrating availability of interest-free funds. The CIT(A) upheld the appellant's contentions, citing the Hero Cycles Supreme Court decision and other High Court judgments, concluding that the AO was unjustified in disallowing the interest claimed under section 36(i)(iii) of the IT Act.

Issue 2: Allowance of interest under section 36(i)(iii) of the Income Tax Act, 1961 for non-business purposes:
The Revenue raised concerns regarding the allowance of interest under section 36(i)(iii) for non-business purposes. The appellant argued that the interest claimed was on loans sanctioned for specific purposes and not related to advances to related entities. The appellant emphasized the turnover and purpose of loans raised for business activities. The CIT(A) considered the availability of interest-free funds, previous year's financial position, and judicial decisions to conclude that the AO was not justified in disallowing the interest claimed under section 36(i)(iii) of the IT Act. The Tribunal confirmed the CIT(A)'s order based on factual analysis and legal precedents, dismissing the Revenue's appeal.

In summary, the judgment addressed the disallowance and allowance of interest expenditure under section 36(i)(iii) of the Income Tax Act, 1961, emphasizing the availability of interest-free funds, specific purposes of loans, and relevant judicial decisions to support the conclusions reached by the CIT(A) and Tribunal.