2022 (6) TMI 405 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) towards interest expenditure - assessee company diverted its interest bearing funds for giving interest free advances / loans for unknown purpose - CIT-A deleted the addition - HELD THAT - As clearly discernible that loans and advances given by the assessee, during the year under consideration, marginally increased by Rs. 6.69 crores, whereas the interest-free unsecured loans obtained by the assessee rose by Rs. 26.93 crores. Further, there was a reduction in term loan from Bank of India. During the year under consideration, the assessee has repaid amount of Rs. 75.58 crores of Export packing credit facility by availing a fresh cash credit facility from Central Bank of India. Thus, from the financials of the assessee it is evident that from the loans/credit facility availed from the aforesaid Banks there was no scope for making any payment of interest free loans and advances. Further, it is also evident that assessee had sufficient interest free funds for making any loans and advances. The aforesaid financial state of affairs of the assessee has also not been disputed by the Assessing Officer. Assessing Officer has neither denied nor brought anything contrary to the fact that the amount of secured loan with regard to term loan from banks were utilised by the assessee for the purpose of capital work in progress and the interest on the said amount was capitalised in the capital work in progress and not debited to the profit and loss account, for the year under consideration. We further find that the Assessing Officer merely on an ad hoc basis made the additions under section 36(1)(iii) of the Act, without bringing anything on record to suggest that interest-bearing funds were actually utilised for the purpose of advancing funds on which no interest was charged by the assessee. - Decided against revenue.

Summary

Issues involved:
Challenge to deletion of disallowance of interest under section 36(1)(iii) of the Act for the assessment year 2011-12.

Detailed Analysis:

Issue 1: Deletion of disallowance of interest under section 36(1)(iii) of the Act:
- The Revenue challenged the impugned order directing the deletion of the disallowance of interest amounting to Rs. 8,08,01,969 under section 36(1)(iii) of the Act.
- The Assessing Officer disallowed the interest expenses claimed by the assessee, as interest-free loans and advances were given out of interest-bearing funds, constituting 54.48% of the total funds.
- The assessee contended that the interest debited to the profit and loss account was for business purposes and all advances given were also business-related.
- The CIT(A) allowed the appeal filed by the assessee after considering the financials, noting that the increased interest-free unsecured loans received during the year were utilized for loans and advances, demonstrating sufficient interest-free funds.
- The Tribunal observed a marginal increase in loans and advances given by the assessee, along with a rise in interest-free unsecured loans obtained, indicating no scope for interest-free loans and advances from bank loans/credit facilities.
- The Assessing Officer failed to show that interest-bearing funds were used for interest-free advances, making an ad hoc addition without evidence of such utilization.
- The Tribunal found no infirmity in the CIT(A)'s order, dismissing the Revenue's appeal and upholding the deletion of the disallowance under section 36(1)(iii) of the Act.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the disallowance of interest, emphasizing the sufficiency of interest-free funds for loans and advances and the lack of evidence supporting the utilization of interest-bearing funds for interest-free advances.