2013 (5) TMI 77 - AT - Income Tax

Disallowance of interest attributable to interest free loan provided - Held that - As per Bombay High Court decision in the case of Reliance Utility Power Ltd (2009 (1) TMI 4 - HIGH COURT BOMBAY ),it was held that if there be interest-free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised the loan, it can be presumed that the investments were from the interest-free funds available - The High Court observed that presumption would arise in case of interest free fund available with investment would be out of interest free fund was available with the company Appellant has given Rs. 1.72 crore as advance interest free and not charged interest on it, the AO had not established the nexus between the interest borrowing fund utilized for interest free advances in the assessment order - If the interest free funds were sufficient to meet the investment in this case also the interest free funds are available and the Bombay High Court proposition in above case is squarely applicable in the case of interest free advances - Thus we allow the appeal of the assessee

Summary

Issues:
- Disallowance of interest expenses of Rs. 10,88,824

Analysis:
1. The appellant, engaged in manufacturing, incurred interest expenses of Rs. 1,81,47,080 on loans but also provided interest-free loans. The AO disallowed a portion of interest expenses due to interest-free loans. The CIT(A) upheld the disallowance, stating interest on such advances is not for business purposes. The appellant failed to prove the nexus of interest-free funds with lending to employees. The disallowance was confirmed.

2. The appellant argued before ITAT that it had interest-free funds of Rs. 14.15 crore, citing a Co-ordinate "B" Bench decision and a Bombay High Court case. The ITAT noted the AO did not establish a link between interest borrowing and interest-free advances. Referring to the Bombay High Court case, ITAT held that if interest-free funds are sufficient to cover investments, it can be presumed that investments are from interest-free funds. As the appellant had interest-free funds, the addition was deleted, allowing the appeal.

3. The ITAT's decision was based on the lack of nexus between interest-free advances and borrowing, following the Bombay High Court's presumption principle. The appellant's argument regarding interest-free funds was considered valid, leading to the deletion of the addition. The ITAT differentiated this case from precedents where disallowances were justified due to lack of commercial expediency. The appeal was allowed in favor of the assessee.

4. Ultimately, the ITAT allowed the appeal, emphasizing the presence of interest-free funds and the application of the Bombay High Court's presumption principle. The decision highlighted the importance of establishing a clear link between borrowing and interest-free advances, leading to the deletion of the addition of interest expenses. The appellant's argument regarding interest-free funds was pivotal in overturning the disallowance.