2021 (3) TMI 119 - AT - Income Tax

Disallowance of interest - AO had proceeded to work out the disallowance by concluding that the terms loans received by the assessee was used to advance the amounts and thereby assessee has utilized interest bearing fund for the purpose of advance - HELD THAT - The summarized amount advanced to Vijuk Equipments Inc. as recorded in the assessment order and also reproduced in the order of CIT(A) reveal that assessee has made aggregating payment on various dates prior to 7.1.2011, being the date of disbursement of term loan of ₹ 329 lakhs. We thus find force in the contention of the Ld AR that the term loan of ₹ 329 lakhs could not have been utilized for making the advance to Vijuk Equipment Inc. In such a situation, we are of the view that no disallowance of interest could be made for the amounts advanced out of term loan of ₹ 329 lakhs. We therefore direct the AO to delete the addition on interest to that extent. As far as payment of ₹ 90.30 lakhs made to Vijuk Equipments Inc. on 09.03.2011 is concerned, before us Ld AR has fairly admitted that the term loan of ₹ 90.30 lakhs could have been said to be utilized for advancing the amount of ₹ 90.30 lacs to Vijuk Equipments Inc. In such a situation, we are of the view that to the extent of disallowance of interest on ₹ 90.30 lacs advanced calls for no interference. We therefore direct the disallowance of interest be restricted out of amount of ₹ 90.30 lakhs paid on 09.03.2011 from the term loan received by the assessee. Thus this ground of assessee is partly allowed.

Summary

Issues:
Disallowance of interest on advances made to another company using borrowed funds.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) relating to the Assessment Year 2011-12. The Assessee, engaged in the business of Printing & Manufacturing of Packaging Material, filed its return of income declaring total income at ?7,58,59,790. The case underwent scrutiny, and the assessment framed under section 143(3) determined the total income at ?8,63,87,970. The primary issue revolved around the disallowance of interest on advances made to M/s Vijuk Equipment Inc. using borrowed funds. The Assessing Officer disallowed interest at 12% on the amount advanced, concluding that the borrowed funds were used for acquiring new plants and machinery, making the interest disallowable. The Commissioner of Income Tax (Appeals) partially granted relief to the Assessee by excluding the interest on the building loan received on the last day of the accounting year. The Assessee contended that the term loan disbursed for machinery purchase was after the advances to Vijuk Equipment Inc., thus not utilized for the advances. The source of the advance was stated to be from business profits, share capital, and free reserves, justifying no disallowance of interest. The Tribunal found merit in the Assessee's contention regarding the term loan disbursement timeline and directed the Assessing Officer to delete the addition on interest to that extent. However, for the amount advanced on 09.03.2011, the Tribunal agreed that the interest disallowance should be restricted, affirming partial relief to the Assessee. Consequently, the appeal was partly allowed, and the disallowance of interest was adjusted accordingly.