2020 (11) TMI 810 - AT - Income Tax

Interest disallowance u/s 36(1)(iii) - assessee did not file any fund flow statements in support of the submissions that own funds were used to make the investments in certain premises, against which the disallowance has been computed by lower authorities - HELD THAT - The perusal of assessee s financial statements would show that the assessee has own funds in the shape of share capital reserves aggregating to ₹ 225.28 Crores at year end as against opening funds of ₹ 153.15 Crores. Besides the above funds, the assessee has interest free unsecured loans of ₹ 58.72 Crores at its disposal at year end. As against this, the capital advances at year end stood at ₹ 20.23 Crores as against opening balance of ₹ 19.83 Crores which would show that there was only a marginal increase of ₹ 40 Lacs during the year. Further, the interest-bearing secured loans obtained by the assessee were meant only for specific purposes i.e. packing credit or post-shipment credit. It could very well be concluded that there was no nexus of borrowed funds with the capital advances made by the assessee and the assessee had sufficient own funds to make the aforesaid investments. Without establishing any direct nexus of borrowed funds vis- -vis capital advances, no such disallowance could have been made by revenue authorities. Thus interest disallowance is not sustainable in law. By deleting the same, we allow the appeal of assessee.

Summary

Issues:
Interest disallowance u/s 36(1)(iii) for ?71,50,119.

Analysis:
The appeal for Assessment Year 2010-2011 contests the order of Ld. Commissioner of Income Tax (Appeals)-10, Mumbai, regarding the disallowance of interest of ?71,50,119 u/s 36(1)(iii). The Authorized Representative for the assessee highlighted that a similar issue arose in the preceding AY 2009-10, where the Tribunal deleted similar additions made by the Ld. AO. The Ld. AR supported the submissions with financial statements showing identical facts. On the contrary, the Ld. DR argued that the facts differed in the current year as the assessee did not provide fund flow statements to prove the use of own funds for investments. The Tribunal examined the submissions, lower authorities' orders, and the Tribunal's previous decision for AY 2009-10.

The material facts revealed that interest disallowance u/s 36(1)(iii) of ?71,50,119 was imposed on the assessee for advancing funds for certain premises without utilizing them during the year. The assessee claimed to have sufficient own funds, including share capital, reserves, and unsecured loans, to justify the investments. However, the Ld. AO computed a proportionate disallowance based on average investments compared to total assets employed. The Ld. CIT(A) upheld the disallowance citing his decision in AY 2013-14. The Tribunal observed the financial statements showing significant own funds, minimal increase in capital advances, and specific use of secured loans for credit purposes, concluding that there was no borrowed funds nexus with the investments.

Referring to the Tribunal's decision for AY 2009-10 and the rulings of Hon’ble Bombay High Court in relevant cases, the Tribunal found the factual scenario similar and unsustainable for interest disallowance. Relying on legal precedents, the Tribunal allowed the appeal, deeming the interest disallowance not legally viable. Consequently, the appeal was allowed, and the impugned interest disallowance was deleted.

In conclusion, the Tribunal's decision pronounced on 22nd October 2020 allowed the appeal, emphasizing the lack of borrowed funds nexus with the investments and the presence of sufficient own funds to justify the interest disallowance.