2024 (11) TMI 890 - AT - Income Tax

Disallowance u/s. 36(1)(iii) - advance to related parties - Since the reserves and surplus of the assessee was less than the advance given to related parties, the AO made a disallowance u/s. 36(1)(iii) - assessee contended that the advance was not given during the year under consideration and that the balance shown is the outstanding carried forward from earlier years - HELD THAT - We notice that there was an opening outstanding balance of Rs. 10,47,87,979/- as on 01.04.2011 and the assessee had given an advance of Rs. 28 crores during the financial year relevant to AY 2012-13. We further notice that the balance is the reserve and surplus stood at Rs. 61,60,35,571/- as on 31.03.2012. We also notice that the outstanding balance in the impugned advance account has been decreasing YoY. Therefore there is merit in the contention of the ld AR that no new advance is extended to sister concern and that the revenue did not bring anything on record to controvert the said contention. See Brindavan Beverages Pvt. Ltd 2016 (10) TMI 1242 - KARNATAKA HIGH COURT . AO is not correct in making the disallowance u/s. 36(1)(iii) of the Act and direct the AO to delete the disallowance made in this regard. Decided in favour of assessee.

Summary

Issues: Disallowance u/s. 36(1)(iii) of the Income Tax Act for interest-free advances to related concerns.

Detailed Analysis:
1. Background: The appeal was against the CIT(A)'s order for AY 2018-19 where the assessee, a private limited company providing aviation services, had made interest-free advances to related concerns. The AO disallowed Rs. 2,56,98,485 under section 36(1)(iii) of the Act.

2. Assessee's Contentions: The assessee argued that the advances were made to a sister concern during AY 2012-13 from sufficient interest-free funds available then. The balance in the advance account had been decreasing, and no new advances were made in the relevant year, thus no disallowance was warranted.

3. CIT(A)'s Decision: The CIT(A) upheld the disallowance, stating that the assessee lacked sufficient interest-free funds during the relevant year. The assessee then appealed to the Tribunal against this decision.

4. Tribunal's Analysis: The Tribunal heard arguments from both sides. The assessee presented financial statements showing interest-free funds available in previous years and the decreasing balance in the advance account. The Revenue contended that statutory restrictions limited advances to sister concerns to 60% of reserves and surplus.

5. Legal Precedents: The Tribunal referred to a Karnataka High Court case where a similar issue was addressed. It was noted that the assessee's own funds well covered the loans and advances, and no disallowance had been made in earlier assessment years. The Tribunal also cited decisions from the Punjab & Haryana High Court, Mumbai High Court, and Gujarat High Court supporting the assessee's position.

6. Tribunal's Decision: The Tribunal found that the disallowance under section 36(1)(iii) was not justified as the assessee had not extended new advances in the relevant year and had sufficient interest-free funds in previous years. Relying on legal precedents and considering the facts of the case, the Tribunal directed the AO to delete the disallowance.

7. Conclusion: The Tribunal allowed the assessee's appeal, emphasizing that no substantial legal question arose for consideration. The disallowance was deemed incorrect, and the AO was instructed to remove the disallowance under section 36(1)(iii) of the Act. The appeal was dismissed, and the order was pronounced on 21st October 2024.