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2020 (4) TMI 213 - AT - Income TaxDisallowance u/s 36(1)(iii) - Interest free funds to sister concerns - HELD THAT - It is an admitted fact that the assessee has made huge borrowing from banks and other financial intuitions and diverted part of such funds to sister concerns to give interest free loans and advances. As per the provisions of section 36(1)(iii), if any borrowed funds is diverted for non business purposes, then interest paid to that extent is not allowable as deduction. In light of the above factual and legal background, if you examine the claim of the assessee that it has given loans and advances to the sister concerns out of business expediency, we find that the assessee has failed to substantiate its claims with the fact that there is an established business connection with the assessee and the sister concerns No doubt, the principles laid down by the Hon ble Supreme Court ,in the case of SA builders Ltd. vs CIT 2006 (12) TMI 82 - SUPREME COURT has applicable, if the assessee made out a case of business expediency in advancing loans to sister concerns. Since, the assessee has failed to make out a case of business connection, we are of the considered view that the case laws relied upon the by the assessee in the case of S.A builders Ltd. vs CIT (supra) has no application to the facts of the present case. Coming back the second arguments of the assessee in the case of Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT - The assessee has made an alternative argument, in light of above judgment that if own funds is in excess of loans and advance or there is mixed funds, including own funds, then the presumption goes in favour of the assessee that loans and advances given is out of interest free funds. In this case, on perusal of facts available on record, including financial statements of the assessee, we find that for the year under consideration, the assessee has incurred losses from its business. Further the net worth of the assessee has been reduced substantially due to losses incurred from the business. At the same time, the long term borrowings and short term borrowings are increased substantially. From the above, it is very clear that there is no interest free fund available with the assesee to explain loans and advances given to sister concerns. Ratio laid down by the Hon ble Bombay high court, in the case of Reliance utility power ltd, is also not applicable to the facts of the present case. As regards, another arguments of the assesee, in light of financial statements for the year that the Ld. AO has incorrectly taken loans and advances as per schedule of short term loans and advances of ₹ 3,34,26,601/- as against actual amount of loans and advances to related parties is only at ₹ 2,58,72,330/- and therefore, if at all interest disallowances is required to be made then the Ld. AO may be directed to interest disallowances to the extent of loans and advances actually given to sister concerns. As per financial statements filed for the year, the assessee has given loans and advances to related parties of ₹ 2,58,72,330/-, whereas the Ld. AO has taken the figure of ₹ 3,34,26,600/-, which includes other advances given in the normal course of business. It is an undisputed fact that advances given in the course of normal business cannot be considered as diversion of interest bearing funds for non business purpose. Therefore, we are of the considered view that the Ld. AO is incorrect in taking other advances for the purpose of disallowances of interest u/s 36(1)(iii) of the Act. However, the facts with regard to the details of loans and advances is available with the Ld. AO, at the time of assessment proceedings is not clear from the records. Therefore, for the limited purpose of verification of facts with regard to the actual amount of loans and advances given to sister concerns out of interest bearing funds, we restored the issue back to the file of the Ld. AO and direct him to consider the arguments of the assessee, in light of financial statements filed for the year that actual amount of loans and advances given to related parties is only at ₹ 2,58,72,330/-. If the Ld. AO found that the actual amount of loans and advances to related parties to is only ₹ 2,58,72,330/-, then the Ld. AO is directed to restrict interest disallowances u/s 36(1)(iii) to that extent - Appeal filed by the assessee for AY 2013-14 is partly allowed for statistical purpose.
Issues Involved:
1. Commercial expediency in advancing loans to sister concerns. 2. Applicability of the principle from Reliance Utilities and Power Ltd. 3. Actual utilization of funds for the purpose of disallowances of interest on borrowed capital. Issue-Wise Detailed Analysis: 1. Commercial Expediency in Advancing Loans to Sister Concerns: The primary issue in the appeals was whether the loans advanced to sister concerns were for business purposes and thus whether the interest paid on borrowed funds should be disallowed under Section 36(1)(iii) of the Income Tax Act. The assessee argued that the loans were given for business purposes, invoking the principle of commercial expediency as laid down by the Supreme Court in S.A. Builders Ltd. vs. CIT. However, both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] found that the assessee failed to substantiate the claim of business connection with necessary evidence. Consequently, the AO disallowed the interest, and the CIT(A) upheld this decision, noting the lack of business connection between the assessee and the sister concerns. 2. Applicability of the Principle from Reliance Utilities and Power Ltd.: The assessee alternatively argued that based on the principle from the Bombay High Court's decision in Reliance Utilities and Power Ltd., if the assessee had sufficient interest-free funds, it should be presumed that the loans were advanced from these funds. The CIT(A) rejected this argument, stating that the assessee did not clarify how the principle applied to its case. The Tribunal also noted that the assessee's financial statements showed substantial losses and increased borrowings, indicating no sufficient interest-free funds to cover the loans to sister concerns. Thus, the Tribunal concluded that the principle from Reliance Utilities and Power Ltd. was not applicable. 3. Actual Utilization of Funds for the Purpose of Disallowances of Interest on Borrowed Capital: The assessee contended that the AO incorrectly calculated the amount of loans and advances, including sums not related to sister concerns. The Tribunal found merit in this argument, noting that the AO included other advances given in the normal course of business. The Tribunal directed the AO to verify the actual amount of loans and advances given to related parties and restrict the interest disallowance to that extent. Specifically, the Tribunal noted that the actual amount of loans and advances to related parties was ?2,58,72,330, not ?3,34,26,600 as considered by the AO. Conclusion: The Tribunal partly allowed the appeals for statistical purposes, directing the AO to verify the actual amount of loans and advances to related parties and restrict the interest disallowance accordingly. The Tribunal upheld the disallowance of interest under Section 36(1)(iii) due to the lack of evidence of commercial expediency and sufficient interest-free funds. The Tribunal's decision applied mutatis mutandis to both assessment years 2013-14 and 2014-15.
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