2021 (7) TMI 572 - AT - Income Tax

Disallowance of interest - appellant company had diverted interest bearing funds to sister concerns / related parties by advancing loans and advances - HELD THAT - In view of the settled position of law that the disallowance, if any, u/s 36(1)(iii) of the Act can be made only to the extent of incremental loans and advances made during the previous year relevant to the assessment year under consideration - The opening balance of loans and advances of sister concerns / related parties should not be considered for the purpose of making, any disallowance for the year under consideration. It is settled position of law that where there is a mixture of both borrowed funds as well as the interest free funds are available, a presumption has to be drawn that investments are made out of the interest free funds as held in the case of CIT Vs. Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT and similar is the decision of Munjal Sales Corporation 2008 (2) TMI 19 - SUPREME COURT . Therefore, no disallowance u/s 36(1)(iii) is called for in the light of the above legal settled position of law and facts of the case in respect of the incremental loans and advances made to the sister concerns / related parties during the previous year relevant to the assessment year under consideration. - Appeal filed by the assessee is allowed.

Summary

Issues:
- Disallowance of interest on diverted funds to sister concerns/related parties.
- Disallowance of income from other sources.
- Discrepancy in disallowance amount by Assessing Officer and CIT(A).
- Application of legal principles for interest disallowance.
- Consideration of incremental advances for disallowance.
- Presumption of investments from interest-free funds.

Analysis:
1. The appeal concerned disallowance of interest on diverted funds to sister concerns/related parties and income from other sources. The Assessing Officer disallowed interest of ?5,15,54,324, while CIT(A) restricted it to ?3,80,00,399. CIT(A) also deleted the addition of ?3,59,33,237 on income from other sources.
2. The appellant argued that non-interest bearing funds were used for advances, supported by financial statements and legal precedents. The appellant contended that loans were made from own funds and incremental advances should be considered for disallowance.
3. The Assessing Officer found that borrowed funds were used for advances, leading to disallowance. However, the ITAT Pune held that incremental advances should be considered for disallowance, citing legal precedents like CIT Vs. Sridevi Enterprises and CIT Vs. Givo Limited.
4. The ITAT Pune emphasized that no disallowance was made in earlier years and incremental interest-free funds exceeded advances made during the relevant year. Hence, the presumption that investments were made from interest-free funds applied, following the legal principles established in various court decisions.
5. Relying on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities, the ITAT Pune concluded that no disallowance under section 36(1)(iii) was warranted. Consequently, the ITAT Pune allowed the appeal and directed the Assessing Officer to delete the disallowance of interest amounting to ?3,80,00,399.

This detailed analysis reflects the ITAT Pune's thorough consideration of the facts, legal arguments, and precedents to arrive at a decision in favor of the appellant regarding the disallowance of interest on diverted funds to sister concerns/related parties.