2022 (7) TMI 484 - AT - Income Tax

Revision u/s 263 - HELD THAT - Assessee has taken a sum during the relevant assessment year as interest free loans and advances. The Ld. AR's contention is that these interest free loans and advances have been utilized to reduce the cost of interest arising out of interest bearing funds taken by the assessee. We find from the submissions made by the AR that the interest free advance is being utilized in the business which reduced the cost of interest of the assessee arising out of interest bearing advances. We also find merit in the argument of the Ld. AR that there is no one to one matching of the interest free advances given and taken and hence it is considered from the own pool of funds available with the assessee. We also find from the order of the Ld. AO that the AO has rightly disallowed the sum of Rs. 96,616/- @ 12% on the difference between the interest free advances taken and given amounting to Rs. 8,05,137/-. In view of the above discussions, we find that prima facie the order of the Ld. AO is not erroneous in law and prejudicial to the interests of the Revenue and hence the order of the Pr. CIT is hereby quashed.

Issues involved:
1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Bar on limitation for passing the order under Section 263.
3. Disallowance of proportionate interest on interest-free advances.
4. Consideration of facts by the Assessing Officer during assessment proceedings.
5. Correctness of the direction to disallow interest by the Principal Commissioner of Income Tax.
6. Utilization of interest-free loans and advances to reduce the cost of interest.

Detailed Analysis:
1. The appeal was filed against the order of the Principal Commissioner of Income Tax (Pr. CIT) passed under Section 263 of the Income Tax Act, challenging the assessment made by the Assessing Officer (AO) for the assessment year 2015-16. The Pr. CIT issued a show cause notice deeming the AO's order as prima facie erroneous in law and prejudicial to the Revenue's interests. The assessee contended that the Pr. CIT failed to appreciate their submissions, leading to a direction to disallow proportionate interest on interest-free advances. The Tribunal analyzed the submissions and found that the AO's assessment was not erroneous, eventually quashing the Pr. CIT's order.

2. The assessee raised concerns about the limitation on passing the order under Section 263, arguing that the impugned order was barred by limitation. However, the Tribunal did not find merit in this argument and proceeded to evaluate the substantive issues raised by the assessee regarding the disallowance of interest on interest-free advances.

3. The key issue revolved around the disallowance of proportionate interest on interest-free advances given to related concerns out of interest-bearing funds taken by the assessee. The Pr. CIT directed the AO to disallow such interest, which the assessee contested. The Tribunal examined the details provided by both parties, including the utilization of interest-free advances to reduce interest costs, and concluded that the AO's decision to disallow a specific amount of interest was appropriate. Consequently, the Tribunal set aside the Pr. CIT's order on this matter.

4. The Tribunal also considered whether the AO had adequately examined the issue of interest-bearing funds versus the application of funds during the assessment proceedings. The assessee argued that the AO had applied due diligence in assessing the matter, contrary to the Pr. CIT's assertion. After reviewing the facts and submissions, the Tribunal determined that the AO's assessment was conducted diligently, dismissing the Pr. CIT's findings as erroneous.

5. Additional grounds of appeal were raised concerning the correctness of the direction given by the Pr. CIT to disallow a specific amount of interest. The Tribunal scrutinized the details provided by the assessee and the arguments presented by both parties. Ultimately, the Tribunal found in favor of the assessee, ruling that the AO's decision to disallow interest was justified, and the Pr. CIT's order was set aside.

6. The Tribunal delved into the utilization of interest-free loans and advances by the assessee to reduce the cost of interest arising from interest-bearing funds. The arguments put forth highlighted the impact of these transactions on the overall financial aspects of the business. After careful consideration, the Tribunal accepted the assessee's position regarding the utilization of interest-free advances, leading to the allowance of the appeal in favor of the assessee.

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