2015 (12) TMI 99 - AT - Income Tax

Addition towards notional interest @ 12% on the amounts advanced to Adityam Technoplast Pvt. Ltd. - Held that - No cogent material on record to establish that the assessee had sufficient/ surplus funds available with him, which could be advanced as interest free loans to the said company. His total capital as on the first day of the financial year was ₹ 18,32,831/- and at the year end was ₹ 17,79,072/-. Secured loan is of ₹ 2,58,375/- and unsecured loan is of ₹ 50,93,062/. The trade creditors and others are of ₹ 1,25,41,822/- and cash credit loan from ICICI Bank is of ₹ 46,63,335/-. The assessee has also issued cheques from cash credit account on different dates. His investment in Fixed Assets is ₹ 78,41,751/-, in Fixed Deposits ₹ 9,98,156/-, in current assets ₹ 1,19,08,899 and in loans and Advance is ₹ 36,86,860/-. From the above, it is clear that the assessee had no surplus funds which could be advanced as interest free loan. It appears that loan has been given to Adityam Polymer (P) Ltd., Roorki for the purpose of purchasing land out of loan fund. The assessee could not be able to substantiate his stand that he had surplus fund which could be advanced as interest free loan to the sister concern so as to make the assessee eligible for deduction of interest. The case laws cited by the assessee, actually deal with the cases where there was surplus fund on account of huge profit or huge reserve or interest free fund. Hence, the same are not applicable to the present case in hand. We, therefore, do not find any good reason or material on record to interfere with the conclusions arrived at by the learned authorities below.- Decided against assessee.

Summary

Issues:
Challenge to addition of notional interest on amounts advanced to another company.

Analysis:
The appellant, a proprietor engaged in business activities, challenged the addition of notional interest on the amounts advanced to another company in the assessment year 2007-08. The appellant had raised unsecured loans and cash credit loans, claiming interest expenses in the Profit and Loss account. Specifically, the appellant had advanced interest-free loans to the other company for purchasing land. The appellant argued that the advances were related to business activities and should not attract disallowance of interest. The appellant contended that if advances were made from non-interest bearing funds and interest-bearing funds were used in the business, no disallowance should be made.

The appellant provided detailed explanations regarding the source of funds for the advances, citing specific amounts and dates of transactions. The appellant also relied on various legal precedents to support the argument that disallowance of interest should be restricted or not applicable in this case. However, the Departmental Representative argued that the capital balance of the appellant was invested in fixed capital assets and that borrowed money diverted for interest-free loans could result in legitimate disallowance of interest.

Upon careful examination of the appellant's financial records, the Tribunal found no evidence of surplus funds available for interest-free loans. The appellant's capital, loans, creditors, and investments were analyzed to determine the availability of surplus funds. It was concluded that the appellant did not have surplus funds to justify the interest-free loans given to the other company. The Tribunal noted that the case laws cited by the appellant were not applicable as they dealt with scenarios involving surplus funds from profits or reserves. Therefore, the Tribunal upheld the decision of the authorities below to disallow the interest claimed by the appellant.

In the final judgment, the Tribunal dismissed the appeal of the appellant, stating that there was no merit in challenging the addition of notional interest on the amounts advanced to the other company. The decision was based on the lack of evidence of surplus funds and the inapplicability of cited case laws to the appellant's situation.

This detailed analysis highlights the key arguments, explanations, legal precedents, and financial assessments considered in the judgment regarding the challenge to the addition of notional interest on amounts advanced to another company.