2019 (11) TMI 354 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) on a proportionate basis - preliminary argument made by AR is that no disallowance of interest could be made on the funds borrowed in the earlier years and lying in opening balance as on 1.4.2009 when the said borrowings and utilization thereon were accepted as meant for business purposes in earlier years - HELD THAT - In the instant case, even after framing the assessment for the AY 2010-11 wherein the interest was disallowed in respect of borrowings made in earlier years, the revenue had not resorted to reopen the earlier years or revise the assessments for the earlier years in the manner known to law. We are equally afraid as to whether the ld DR would advance the same argument in the issue of reopening of assessments for those earlier years where return has been processed u/s 143(1) after due application of mind by the AOs at that relevant point of time. Hence we are not inclined to accept the arguments of the ld DR in this regard. We find that the ld AR submitted that the amounts advanced to Neeta M Mehta alone had increased during the year. We find that with regard to amounts advanced to all other parties except Neeta M Mehta, the closing balance had only reduced when compared to the opening balance and hence there cannot be any disallowance of interest on the opening balance of loans advanced to parties - See VIRENDRA R. GANDHI VERSUS A.C.I.T 2014 (11) TMI 1081 - GUJARAT HIGH COURT With regard to loan given to Neeta M Mehta during the year, we find that during the year , the assessee had advanced only a sum to the said party and we find that assessee is having sufficient own funds during the year in the form of current year profits before depreciation to the tune of ₹ 4.24 crores. Hence it could be reasonably presumed that the amounts to Neeta M Mehta were advanced interest free out of own funds available with the assessee in the form of current year profits itself. Hence there cannot be any disallowance of interest u/s 36(1)(iii) on a proportionate basis even for the same. We direct the ld AO to delete the disallowance of interest u/s 36(1)(iii) - Decided in favour of assessee

Summary

Issues Involved:
1. Justification of disallowance of interest u/s 36(1)(iii) of the Income Tax Act, 1961, on a proportionate basis.

Issue-wise Detailed Analysis:

1. Justification of Disallowance of Interest u/s 36(1)(iii):

Facts:
The assessee company is engaged in manufacturing and trading of industrial fabrics. The Assessing Officer (AO) observed that the assessee had substantial secured and unsecured loans and a significant finance cost. The AO noted that the assessee had made interest-free advances to certain parties and concluded that interest-bearing funds were diverted for non-business purposes, leading to a proportionate disallowance of interest amounting to ?95,10,449/-.

Assessee's Arguments:
The assessee contended that the advances were for business purposes, including property purchase, share acquisition, and salary advances. The assessee also argued that it had sufficient interest-free funds available, which should negate the disallowance of interest.

Assessing Officer's Findings:
The AO rejected the assessee's contentions, noting that the share application money was received in the subsequent financial year and could not have been used for the advances. The AO also noted that certain advances were capital in nature and should have been capitalized. Consequently, the AO made a proportionate disallowance of interest.

Commissioner of Income Tax (Appeals) [CIT(A)] Findings:
The CIT(A) upheld the AO's decision, stating that:
- No explanation was provided for advances to Ajit G Mehta and Jitendra G Mehta.
- The advance to Mamta A Mehta lacked evidence of commercial expediency.
- Advances for property purchases were not for business purposes, and the proviso to section 36(1)(iii) applied.
- The advance to Mecords Leasing & Finance lacked details to prove business necessity.
- The assessee’s claim of having sufficient interest-free funds was not supported by the balance sheet.

Tribunal's Analysis:
The Tribunal observed that:
- Borrowings made in earlier years and their utilization were accepted as genuine for business purposes in earlier years, following the principle established by the Karnataka High Court in CIT vs Sridev Enterprises.
- No disallowance of interest was made in earlier years, and the revenue did not reopen those assessments.
- The assessee had sufficient own funds during the year, including current year profits, to cover the advances made to Neeta M Mehta.

Decision:
The Tribunal concluded that:
- No disallowance of interest could be made on the opening balance of loans advanced to parties, as the borrowings were accepted for business purposes in earlier years.
- The assessee had sufficient own funds to cover the advances made during the year.
- The disallowance of interest u/s 36(1)(iii) amounting to ?95,10,449/- was to be deleted.

Conclusion:
The Tribunal allowed the appeal, directing the AO to delete the disallowance of interest, thus siding with the assessee's arguments and evidence presented.

Order Pronouncement:
The order was pronounced in the open court on 04/10/2019.