2020 (5) TMI 453 - AT - Income Tax

Disallowing proportionate expenses of interest - HELD THAT - Tribunal in immediately preceding year has considered this issue and even the CIT(A) while confirming the disallowance has relied on order in assessment year 2010-11, i.e. immediately preceding year. We also noted that no disallowance of interest expense has been made in the earlier years with regard to opening balance of said borrowings and utilisation thereof. As noted that in this year also the position does not change and assessee is having sufficient own funds in the form of current year s profit before depreciation. Even otherwise, assessee also contended that assessee had at its disposal corresponding interest free advances received from various parties mainly comprising of share application money amounting to ₹ 18.80 crores in aggregate, which exceeds the above interest free advances made by assessee. In terms of the above facts of the present case and the precedent in the immediately preceding year, no disallowance is to be made, as made by CIT(A) on the opening balance qua their utilisation, in earlier year. Hence, we delete the proportionate disallowance of interest expense and allow the appeal of assessee. - Appeal of assessee is allowed.

Summary

Issues:
Disallowance of proportionate interest expenses by Assessing Officer without appreciating the facts of the case.

Analysis:

Issue 1: Disallowance of proportionate interest expenses

The appeal was filed against the order of CIT(A) confirming the Assessing Officer's action of disallowing proportionate interest expenses without fully appreciating the facts of the case. The assessee, engaged in the business of manufacturing and trading of fabrics, showed secured and unsecured loans in the balance sheet. The Assessing Officer disallowed the interest expenses of ?94,23,665, noting the diversion of interest-bearing funds towards interest-free loans given to various parties. The Assessing Officer required the assessee to establish a nexus between the availability of interest-free funds and the funds given to parties. The CIT(A) upheld the disallowance, citing a previous year's order where similar advances were considered to be given out of interest-bearing funds. The assessee appealed, presenting the Tribunal's order for the preceding year where identical circumstances led to the deletion of the disallowance. The Tribunal, considering the facts and precedents, ruled in favor of the assessee, emphasizing that no disallowance was warranted as the assessee had sufficient own funds and interest-free advances received exceeded the interest-free advances made. Consequently, the proportionate disallowance of interest expenses was deleted, and the appeal of the assessee was allowed.

This comprehensive analysis of the legal judgment provides a detailed insight into the issues involved and the Tribunal's decision regarding the disallowance of proportionate interest expenses.