2015 (6) TMI 760 - AT - Income Tax

Disallowances of interest expenses - assessee has running account with the sister concern - Held that - As far as Assessment Year 2007-08 is concerned, assessee has liquidated its investment of ₹ 100 crore, therefore, a sum of ₹ 100 crore was available with the assessee. During the course of hearing, we have confronted the ld. counsel to show that on liquidation of investment, assessee had realized 100 crore. Because, if the value of shares was diminished on account of fluctuation in market, then how credit of ₹ 100 crore can be given for quantifying the interest free funds with the assessee. Ld. counsel showed us the realization of the investment at ₹ 100 crore accounted in the accounts. Similarly, it has reserve and surplus of ₹ 165 crore. If ₹ 24 crore taken out from this which was added on account of revaluation in the last year, then, the sum at ₹ 141 crore will be available to the assessee. If the investment realized by the assessee out of liquidation of ₹ 100 crore in the shares is added with interest free funds at ₹ 141 crore, then, assessee has the funds of ₹ 241 crore. It has given interest free advances of ₹ 153.52 crore only. It has demonstrated that it has more interest free fund than the one given to the sister concern. There is no dispute on facts between both the Assessment Years. Therefore, considering the discussion in Assessment Year 2006- 07, no disallowance is sustainable in this year also. These grounds of appeals are allowed and disallowance at ₹ 44,65,790/- as well as ₹ 46,76,672/- in Assessment Year 2006-07 and 2007-08 are deleted. - Decided partly in favour of assessee.

Issues Involved:

1. Disallowance of expenses for prior period.
2. Charging of interest under sections 234A, B, C, and D.
3. Disallowance of interest expenses due to alleged diversion of interest-bearing funds to sister concerns.

Detailed Analysis:

1. Disallowance of Expenses for Prior Period:

The assessee challenged the disallowance of expenses amounting to Rs. 37,592/- under ground no. 2, which was related to prior period expenses. The learned counsel for the assessee did not press this ground due to the smallness of the amount involved. Consequently, this ground was treated as rejected.

2. Charging of Interest Under Sections 234A, B, C, and D:

In ground no. 4, the assessee challenged the charging of interest under sections 234A, B, C, and D. The learned counsel for the assessee submitted that the charging of interest is consequential in nature. Therefore, this ground did not require any specific finding and was rejected.

3. Disallowance of Interest Expenses Due to Alleged Diversion of Interest-Bearing Funds to Sister Concerns:

The primary issue in both assessment years 2006-07 and 2007-08 was the disallowance of interest expenses amounting to Rs. 44,65,790/- and Rs. 46,76,672/- respectively. The Assessing Officer (AO) found that the assessee had taken loans and paid interest on them, while also advancing substantial interest-free loans to sister concerns. The AO concluded that the interest-bearing funds were used for non-business purposes and disallowed the interest expenses.

The assessee argued that it had sufficient interest-free funds available to cover the interest-free advances given to sister concerns. It was contended that the interest-bearing funds were used for business purposes, and the interest-free advances were covered by the available interest-free funds.

The assessee also argued that the advances to sister concerns were made for business purposes, invoking the principle of commercial expediency. The Departmental Representative countered that the assessee failed to establish the availability of interest-free funds and did not provide evidence of commercial expediency.

The Tribunal examined the availability of funds and found that the assessee had sufficient interest-free funds to cover the interest-free advances. The Tribunal referred to the balance sheet and noted that the assessee had significant reserves and surplus, as well as liquidated investments, which provided ample interest-free funds.

The Tribunal also cited the judgment of the Hon'ble Bombay High Court in the case of CIT Vs Reliance Utilities & Power Ltd (313 ITR 340), which established that when interest-free funds are available, it is presumed that interest-free advances are made from those funds. The Tribunal noted that the assessee had demonstrated sufficient interest-free funds to cover the advances to sister concerns.

For assessment year 2007-08, the Tribunal observed that the assessee had liquidated investments worth Rs. 100 crore, which added to the interest-free funds. The total interest-free funds available exceeded the interest-free advances given to sister concerns.

Based on these findings, the Tribunal concluded that the disallowance of interest expenses was not justified. The grounds of appeal related to the disallowance of interest expenses were allowed, and the disallowances of Rs. 44,65,790/- and Rs. 46,76,672/- in assessment years 2006-07 and 2007-08 respectively were deleted.

Conclusion:

The appeals of the assessee were partly allowed, with the Tribunal deleting the disallowances of interest expenses for both assessment years. The order was pronounced in the open court on 16-06-2015.

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