2018 (1) TMI 881 - AT - Income Tax

Disallowance of interest expenditure - sufficient funds of its own for making the investments - Held that - Notably, major part of the interest free loans are continuing from the preceding assessment years and only an amount of ₹ 10,00,000/ has been advanced to one person in the impugned assessment year. It is also established on record that the assessee was having huge interest free fund available with it not only take care of the interest free loans but also the amount spent in construction of factory premises. CIT(A) has recorded a categorical finding of fact that the borrowed funds were exclusively utilized for export of diamonds. Therefore, when the assessee was having sufficient interest free funds available with it to take care of the interest free loans and construction of factory premises, no disallowance out of interest expenditure can be made in view of the ratio laid down in case of Reliance Utilities And Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT - Decided in favour of assessee

Summary

Issues:
Deletion of additions made on account of disallowance of interest expenditure.

Analysis:
The appeal was filed by the Department against the order of the Ld. Commissioner of Income Tax (Appeals) for the Assessment Year 2007-08, specifically challenging the deletion of additions related to interest expenditure. The Assessing Officer noted that the assessee had advanced interest-free loans to several individuals while also availing loans from banks and financial institutions on which interest was being paid and claimed as a deduction. The Assessing Officer questioned the justification for not disallowing interest expenditure due to interest-free loans. The Assessing Officer calculated a disallowance of interest expenditure based on a presumed interest rate of 5.75% per annum on the interest-free loans and advances, resulting in a specific amount being disallowed.

Upon appeal, the First Appellate Authority examined the financial records of the assessee and found that there was a significant interest-free surplus fund available, indicating that the interest-free advances and construction expenses were adequately covered by these funds. Citing the precedent set by the Hon'ble Bombay Court, the First Appellate Authority deleted the disallowance made by the Assessing Officer regarding interest costs. Additionally, it was observed that the borrowed funds were utilized exclusively for the export of diamonds, not for the construction of factory premises, thereby justifying the allowance of interest costs under section 36(1)(iii).

During the proceedings, the Departmental Representative supported the Assessing Officer's observations, while the Authorized Representative reiterated the assessee's stance. The Tribunal considered the submissions and records, emphasizing that the Assessing Officer's disallowance was based on the presumption that interest-bearing funds were used for interest-free loans and construction expenses. However, the Tribunal noted that the assessee had substantial interest-free funds available, with borrowed funds specifically allocated for diamond exports. Given the lack of a direct nexus between borrowed funds and interest-free activities, the Tribunal upheld the First Appellate Authority's decision to dismiss the Department's appeal, concluding that no disallowance of interest expenditure was warranted.

Therefore, the Tribunal upheld the First Appellate Authority's order, dismissing the Department's appeal and affirming that no disallowance should be made out of interest expenditure.