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2019 (6) TMI 539 - AT - Income TaxDisallowance of interest - diversion of funds for a non-business purpose - interest-bearing fund @15.10% diverted at a lower rate of interest @ 12%- sufficiency of own funds - HELD THAT - As owned fund of the assessee as on 31st March 2013 and 31st March 2014 stands at 9, 20, 43, 295.00 and 15, 09, 83, 383.00 which is more than the amount of advances of 7, 66, 40, 811 given at a lower rate of interest. The details of the own fund and the amount of impugned advances are not in dispute. Therefore a presumption can be drawn that the assessee has advanced the money to the relatives of the partners out of its fund. See RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT HDFC BANK LTD. 2014 (8) TMI 119 - BOMBAY HIGH COURT and UTI BANK LTD. 2013 (8) TMI 238 - GUJARAT HIGH COURT - Decided in favour of assessee.
Issues Involved:
1. Disallowance of interest expenses due to alleged diversion of funds for non-business purposes. 2. Calculation and justification of interest on advances given to relatives. 3. Determination of whether advances were given from borrowed funds or the firm's own funds. 4. Consideration of judicial pronouncements relevant to the case. Issue-wise Detailed Analysis: 1. Disallowance of Interest Expenses: The primary issue raised by the assessee was the disallowance of interest expenses due to the alleged diversion of funds for non-business purposes. The CIT(A) partly allowed the appeal but upheld the disallowance made by the AO, which was contested by the assessee. The assessee argued that the disallowance was based on the misconception that the advances were made from borrowed funds, whereas they were actually made from the firm's own funds. 2. Calculation and Justification of Interest on Advances: The AO observed that the assessee had borrowed funds from the Bank of Baroda at an interest rate of 15.10% and advanced these funds to relatives at a lower interest rate of 12%. The AO calculated the interest on these advances at the higher rate of 15.10%, leading to an addition of ?52,75,506 to the assessee's total income. The CIT(A) reduced this addition by ?11,34,689 after considering the interest income already declared by the assessee. 3. Determination of Source of Advances: The assessee contended that the advances were made from its own funds, not from the borrowed funds. The assessee's balance sheet showed sufficient own funds to cover the advances. The Tribunal noted that the assessee's own funds as of 31st March 2013 and 31st March 2014 were ?9,20,43,295 and ?15,09,83,383, respectively, which were more than the advances of ?7,66,40,811. Based on this, a presumption was made that the advances were from the assessee's own funds, not the borrowed funds. 4. Judicial Pronouncements: The assessee relied on several judicial pronouncements to support its case, including: - Gujarat Narmada Valley Fertilizers Co. Ltd. vs. ACIT: Held that if sufficient own funds are available, loans and advances to associate companies should not lead to disallowance of interest on borrowed funds. - Reliance Utilities and Power Ltd.: Established that if both interest-free and borrowed funds are available, a presumption arises that investments are made from interest-free funds if they are sufficient. - HDFC Bank Ltd.: Similar to the above, it was presumed that investments were made from interest-free funds if they were sufficient. - UTI Bank Ltd.: Reiterated that if sufficient interest-free funds are available, they are presumed to be used for tax-free investments, and no disallowance under section 14A is warranted. Conclusion: The Tribunal concluded that the assessee had sufficient own funds to cover the advances made to relatives and, therefore, no disallowance of interest expenses was justified. The Tribunal reversed the orders of the lower authorities and directed the AO to delete the addition made on this account. The appeal of the assessee was allowed in full. Final Judgment: The appeal of the assessee was allowed, and the AO was directed to delete the addition made due to the alleged diversion of funds for non-business purposes. The Tribunal's decision was pronounced in open court on 27/05/2019.
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