2022 (12) TMI 1549 - AT - Income Tax

Disallowance of interest expenditure u/s 36(1)(iii) - AO took a view that interest bearing funds have been diverted for making interest free advance - disallowance of interest pertaining to the said advances computed @12% of the interest free advances - sole contention raised by the ld. counsel for the assessee was that it had sufficient interest free funds at its disposal in the form of capital for making investment in interest free advances HELD THAT - Hon ble Apex Court in the case of CIT Vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT that presumption in such cases was that interest free advances had been made out of interest free funds, warranting no disallowance of interest under section 36(1)(vii) of the Act. DR was unable to controvert the factual contentions made by the ld. counsel for the assessee before us, nor was he able to distinguish the decision relied upon by the Ld. Counsel for the assessee before us of the Hon ble Apex Court. Since the assessee has demonstrated the availability of sufficient own funds for the purpose of making interest free funds, the issue, we find, is squarely covered by the decision of Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT following which, we hold that no disallowance under section 36(1)(vii) is warranted in the facts and circumstances of the case. Accordingly, the disallowance of interest u/s 36(1)(iii) is hereby directed to be deleted. Appeal of the assessee is allowed.

Summary

The appeal was filed by the assessee against the Commissioner of Income Tax(Appeals) regarding the disallowance of interest expenditure under section 36(1)(iii) of the Income Tax Act, 1961 for the assessment year 2014-15. The assessee, engaged in trading shares and securities, had claimed interest expenditure while having interest-free advances. The Assessing Officer disallowed a portion of the interest, which was upheld by the Commissioner. However, the Tribunal ruled in favor of the assessee, citing the availability of sufficient interest-free funds for the interest-free advances, in line with the decision in CIT Vs. Reliance Industries Ltd. The disallowance of interest under section 36(1)(iii) was directed to be deleted, and the appeal was allowed.