2015 (4) TMI 45 - AT - Income Tax

Disallowance on account of interest - Held that - It is apparent the networth / non-interest bearing funds available with the company were much more than the Loan & Advances given. We find that the Inventories held by the assessee company has reduced from ₹ 47.79 cores to ₹ 36.79 cores i.e. by ₹ 11 cores. The cash and bank balances have reduced from ₹ 1.29 cores to ₹ 0.40 cores i.e. by ₹ 0.89 cores. Thus we find that the funds of ₹ 11.89 cores released from the current assets became available as assessee own interest free funds as submitted by them. The Hon'ble Supreme court in the case of S A Builders Ltd. vs CIT (2006 (12) TMI 76 - SUPREME COURT OF INDIA) has held that if the borrowed funds are lent to a sister concern interest free as a measure of commercial expediency, the interest paid on the borrowed fund is for the purpose and the same should be allowed as deduction. Therefore, even if it is presumed that the interest advances were given out of borrowed funds, it will be considered as prudent business decision and to protect the earning of business income and the interest will be allowable as deduction not only under section 36 but also under section 37 of the Act. We find that the assessee had sufficient amount of money towards Share Capital, Reserve & Surplus and the Interest Free Advances given were fully covered by amount of Share Capital, Reserve & Surplus, disallowance of Interest need to be deleted and taking into consideration of the Coordinate Bench of the ITAT C Bench, New Delhi in assessee s own case for the assessment year 2003-04 2012 (10) TMI 317 - ITAT, DELHI in Revenue s appeal, we decide the issue against the Revenue by deleting the addition of 1,75,51,634/- on account of interest. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of interest on borrowed funds used for advancing interest-free loans to a sister concern.
2. Assessment of whether the interest-bearing loans were used for business purposes or non-business purposes.

Issue-Wise Detailed Analysis:

Disallowance of Interest on Borrowed Funds:
The primary issue in this case revolves around the disallowance of Rs. 1,75,51,634/- on account of interest paid on borrowed funds, which were allegedly used to advance interest-free loans to a sister concern. The Assessing Officer (AO) observed that the assessee had taken loans amounting to Rs. 18,00,89,042/- as of 31.03.2002 and paid interest on these loans. Simultaneously, the assessee had advanced loans amounting to Rs. 51,81,23,177/- without earning any interest. The AO concluded that the interest-bearing loans were diverted for non-business purposes, leading to the disallowance of the interest expenses.

Assessment of Business vs. Non-Business Purpose:
The AO's contention was that the assessee did not maintain separate accounts for funds invested in the business and those given for non-business purposes. Consequently, the AO disallowed the interest expenses related to the loans and advances given for non-business purposes. The CIT(A) upheld this disallowance, leading to the present appeal.

Arguments by the Assessee:
The assessee argued that similar disallowances had been dealt with in their favor in the assessment year 2003-04. In that year, the AO had disallowed 40% of the interest on an estimate basis, but the CIT(A) entirely deleted the addition, a decision upheld by the Tribunal. The assessee contended that the advances were made out of owned funds and were on account of commercial expediency. They provided a detailed financial position showing that the non-interest-bearing funds available with the company were much more than the loans and advances given.

Financial Position:
The assessee provided the following financial details:
- Share Capital: Rs. 12,30,83,123/-
- Reserve & Surplus: Rs. 5,90,42,225/-
- Total non-interest-bearing funds: Rs. 71,35,05,648/-
- Interest-bearing loans: Rs. 18,00,89,042/-
- Loans & Advances given: Rs. 51,81,23,177/-

The assessee argued that the funds released from current assets became available as their own interest-free funds, and the loans and advances were given in the usual course of business.

Legal Precedents and Reliance:
The assessee relied on several legal precedents to support their case, including:
- DCIT vs U.K. Paints (India) Ltd
- Commissioner of Income Tax vs Reliance Utilities & Power Ltd.
- Commissioner of Income Tax vs Tin Box Co
- CIT vs Hotel Savera

These cases established that if non-interest-bearing funds are available and exceed the interest-free advances, no disallowance of interest is warranted.

Tribunal's Findings:
The Tribunal found considerable merit in the assessee's submissions and noted that the ITAT 'C' Bench, New Delhi, had decided a similar issue in favor of the assessee for the assessment year 2003-04. The Tribunal observed that the non-interest-bearing funds available with the company were much more than the loans and advances given. Additionally, the Supreme Court in S A Builders Ltd. vs CIT held that if borrowed funds are lent to a sister concern interest-free as a measure of commercial expediency, the interest paid on the borrowed fund should be allowed as a deduction.

Conclusion:
The Tribunal concluded that the assessee had sufficient non-interest-bearing funds to cover the interest-free advances. Therefore, the disallowance of interest was deleted, and the appeal was allowed in favor of the assessee.

Final Judgment:
The Tribunal allowed the assessee's appeal, deleting the addition of Rs. 1,75,51,634/- on account of interest. The order was pronounced in the Open Court on 26/03/2015.

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