2016 (4) TMI 808 - AT - Income Tax

Disallowance of interest made u/s 36(1)(iii) - Held that - In the present appeal, the accounts were mixed and the disallowance was made by the ld. Assessing Officer on the plea that the assessee could not prove that only surplus funds were given for acquisition of fixed asset. However, the claim of the assessee is that the own networth of the assessee is 124.54 crores and unsecured interest free loans from the promoter was ₹ 74.78 crores and even the current year net profit is much more than the investment in capital asset. The ratio laid down in CIT vs Reliance Utilities and Power Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT ), wherein, the assessee was having sufficient interest free funds of its own and apart from substantial share holder funds, it is presumed that investment in sister concern were made by the assessee out of interest free funds, thus, no part of interest on borrowings can be disallowed on the basis that investment were made out of interest bearing funds, supports the case of the assessee. Disallowance of interest made u/s 36(1)(iii) deleted - Decided in favour of assessee

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) of the Act.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai involved the disallowance of interest amounting to ?9,93,457 made under section 36(1)(iii) of the Income Tax Act. The assessee contended that own funds were utilized for acquiring capital assets, not borrowed funds. The Assessing Officer observed that the assessee paid substantial interest on business advances obtained from banks despite having significant own funds. The Tribunal considered various legal precedents, including the case of Reliance Utilities and Power Ltd., to support the assessee's position. The Tribunal noted that the Hon'ble High Court had previously ruled similarly in cases like CIT vs HDFC Bank Ltd. The Tribunal emphasized the importance of the principle of law in deciding disputes and concluded that the disallowance of interest was not justified in this case. Consequently, the Tribunal allowed the appeal of the assessee.

In summary, the key issue in this judgment was the disallowance of interest under section 36(1)(iii) of the Act based on the source of funds used for acquiring capital assets. The Tribunal analyzed the facts, legal precedents, and the contentions of both parties to determine that the disallowance was unjustified, ultimately ruling in favor of the assessee.