2015 (2) TMI 205 - HC - Income Tax

Disallowance of interest made by the Assessing Officer u/s. 36(1)(iii) - whether interest free funds were available with the assessee? - Held that - Tribunal was justified in holding that interest free funds were available with the assessee and thereby deleting the disallowance of interest made by the Assessing Officer u/s. 36(1)(iii) of the Act. The Tribunal has rightly considered that the assessees have clearly demonstrated that it had interest free funds available and the balance amount of interest free advances after reducing the advance of M/s. Mehta Financiers was given for purchase of shares. The Tribunal proceeded on the footing that if total interest-free advances including debit balances of partners do not exceed the total interest-free funds available with the assessee, no interest is disallowable on account of utilisation of fund for non-business purposes and if it exceeds, the proportionate disallowance can be made. We are in complete agreement with the findings of fact arrived at by the Tribunal. - Decided in favour of assessee.

Summary

Issues:
Challenge to Tribunal's order on disallowance of interest under section 36(1)(iii) of the Act.

Analysis:
1. The appeals were filed by the revenue against the impugned order of the Income Tax Appellate Tribunal, which deleted the disallowance of interest amount made by the Assessing Officer under section 36(1)(iii) of the Act. The substantial question of law raised was whether the Tribunal was correct in holding that interest-free funds were available with the assessee, justifying the deletion of the disallowance.

2. The assessees initially filed their income tax returns for the relevant assessment years. During the assessment proceedings, the Assessing Officer disallowed certain interest amounts and stamp charges, leading to an appeal by the assessee before the CIT(A). The CIT(A) partially allowed the appeals, prompting both the assessee and the revenue to appeal to the Tribunal. The Tribunal ultimately deleted the disallowance of interest amount, which was contested by the revenue in the present appeals.

3. The revenue argued that the Tribunal did not provide sufficient reasons for allowing the appeals filed by the assessee, requesting a remand for reconsideration with clear and convincing justifications. Conversely, the respondents supported the Tribunal's order, emphasizing that the interest-free funds available with the assessee exceeded the balance, warranting no disallowance of interest. They cited relevant case laws to strengthen their position.

4. The Court examined section 36(1)(iii) of the Act, which pertains to the deduction of interest paid on capital borrowed for business purposes. Referring to previous judgments, the Court highlighted the principle that if interest-free funds are adequate to cover investments, the interest is deductible. The Court also emphasized the concept of commercial expediency in determining the allowability of interest on borrowed funds.

5. Relying on the precedents of Amod Stamping and Raghuvir Synthetics, the Court concluded that the Tribunal's decision to delete the disallowance of interest was justified. It was established that the assessee had ample interest-free funds available, and the Tribunal's assessment of the utilization of these funds for business purposes was deemed appropriate. Consequently, the Court affirmed the Tribunal's order, dismissing the appeals in favor of the assessee.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee regarding the availability of interest-free funds and the deletion of the disallowance of interest under section 36(1)(iii) of the Act.