2022 (2) TMI 573 - AT - Income Tax

Disallowing interest claimed u/s. 36(1)iii) for giving interest free funds to sister concerns - HELD THAT - For the interest bearing funds diverted towards interest free loans advanced to sister concerns the assessee explained that the assessee has cash accruals in the shape of depreciation and cash equivalent at the end of the year. According to him, this is sufficient to meet the interest free loans advanced to sister concerns and these are not out of interest bearing loan funds on which expenditure is being claimed. When these facts were confronted to ld. Senior DR, he could not controvert the factual situation. We noted that the assessee is able to explain that interest free loans advanced to sister concerns are not diverted out of interest bearing loans rather accrual of interest free funds, which is enough to meet out the same. Hence, we are of the view that this disallowance deserves to be deleted. We delete the disallowance and direct the AO accordingly. - Decided in favour of assessee.

Summary

Issues:
Disallowance of interest claimed under section 36(1)(iii) of the Income Tax Act for providing interest-free funds to sister concerns.

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of interest claimed under section 36(1)(iii) of the Income Tax Act for providing interest-free funds to sister concerns. The assessee had obtained loans, including interest-free loans, and incurred interest expenditure on other loans. The Assessing Officer (AO) disallowed a portion of the interest claimed as a business expenditure due to diverting interest-bearing funds for non-business purposes or interest-free loans to parties. The AO made a disallowance of ?14,04,336 out of the total interest expenses claimed. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading the assessee to appeal to the Tribunal.

Upon hearing the arguments and examining the facts, the Tribunal considered the explanation provided by the assessee. The assessee clarified that the interest-free loans to sister concerns were not from interest-bearing loan funds but were covered by cash accruals and cash equivalents. The Tribunal found the explanation satisfactory and concluded that the disallowance was unjustified. Consequently, the Tribunal ruled in favor of the assessee, allowing the appeal and directing the Assessing Officer to delete the disallowance.

In summary, the Tribunal overturned the decision of the Commissioner of Income Tax (Appeals) and the Assessing Officer, holding that the disallowance of interest claimed under section 36(1)(iii) of the Income Tax Act for providing interest-free funds to sister concerns should be deleted. The Tribunal accepted the assessee's explanation that the interest-free loans were covered by cash accruals and cash equivalents, not by interest-bearing loan funds claimed as business expenditure.