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2022 (1) TMI 1043 - AT - Income TaxDisallowance u/s. 36(1)(iii) - AO has not accepted the assessee s contention of having advanced money to UBPL its sister concern for business purposes - HELD THAT - Hon ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. 2019 (1) TMI 757 - SUPREME COURT has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year apart from substantial shareholders funds presumption gets established that the investments in sister concerns were made by the assessee out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In reaching this conclusion relied on the judgment in the case of East India Pharmaceutical Works Ltd. 1997 (3) TMI 5 - SUPREME COURT - Similar view has been taken in CIT vs. Tin Box Company 2002 (11) TMI 75 - DELHI HIGH COURT holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. More recently the Hon ble Supreme Court in CIT (LTU) VS. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT has reiterated the same view. When we examine the amount of Investmentsas against the a vailability of Share Capital and Reserves it becomes evident that the amount of such Investments is much less than the amount of shareholders fund. Respectfully following the precedent we order to delete the disallowance of interest. - Decided in favour of assessee.
Issues: Disallowance of interest u/s. 36(1)(iii) of the Income-tax Act, 1961
The judgment pertains to an appeal against the order of the CIT(A) confirming the disallowance of a specific amount made by the Assessing Officer under section 36(1)(iii) of the Income-tax Act, 1961 for the assessment year 2011-12. The appellant, a company engaged in the business of manufacturing and selling beers, had advanced a significant amount to a sister concern, leading to the disallowance of interest by the AO. The AO's decision was based on the premise that the advance was made for non-business purposes. The appellant's contention that the advance was for business purposes was not accepted by the AO. The appellant's shareholders' fund was substantially higher than the amount advanced to the sister concern during the year. The Tribunal analyzed the facts and legal precedents to determine the validity of the disallowance of interest. Citing the judgment of the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd., the Tribunal noted that when an assessee possesses sufficient interest-free funds apart from substantial shareholders' funds, the presumption is established that investments in sister concerns were made from interest-free funds. This principle was supported by the Supreme Court's judgment in East India Pharmaceutical Works Ltd. Vs. CIT and the Delhi High Court's decision in CIT vs. Tin Box Company. Additionally, the Tribunal referred to the Supreme Court's ruling in CIT (LTU) VS. Reliance Industries Ltd., which reiterated the same view. The Tribunal found that the amount of investments in the sister concern was significantly lower than the shareholders' fund, leading to the deletion of the disallowance of interest. In conclusion, the Tribunal allowed the appeal, ordering the deletion of the disallowance of interest amounting to the specific sum. The decision was based on the established legal principles regarding the utilization of interest-free funds for investments in sister concerns when the shareholders' fund exceeds the amount advanced. The judgment was pronounced in open court on 18th January 2022.
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