2022 (7) TMI 998 - AT - Income Tax

Disallowing the interest expenditure - Addition u/s. 36(1)(iii) the same was not incurred for the purpose of business - As per assessee he has more interest free funds available with it for making investment in the interest free advances - HELD THAT - We direct the AO to restrict the disallowance of interest as the factual situation categorically states that the assessee has more interest free funds available with it than the interest free advances given by assessee. In such situation, we restrict the disallowance and direct the AO accordingly. The appeal of the assessee is partly allowed.

Summary

Issues:
Disallowance of interest expenditure under section 36(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Background and Disallowance of Interest Expenditure:
The appeal arose from the Commissioner of Income Tax (Appeals)-9, Chennai's order confirming the disallowance of interest expenditure by the Assessing Officer (AO) under section 36(1)(iii) of the Act. The AO disallowed Rs. 1,10,74,397/- of interest expenditure on the grounds that it was not incurred for business purposes.

2. Factual Findings and CIT(A)'s Decision:
The assessee, engaged in construction and allied activities, had borrowed substantial loans and invested in a partnership firm without earning interest income. The AO computed a disallowance based on an average interest rate of 15.25%. The CIT(A) confirmed a disallowance of Rs. 1,10,74,397/- and deleted the balance amount of Rs. 26,90,960/-.

3. Arguments and Remand Report:
The assessee argued that it had sufficient interest-free funds available to cover the interest-bearing loans. The remand report supported restricting the disallowance to Rs. 10,25,686/-, as the borrowed capital was invested in the partnership firm. The AO's lack of evidence on interest rate calculations was noted.

4. Tribunal's Decision:
The Tribunal directed the AO to restrict the disallowance to Rs. 10,25,686/- based on the available interest-free funds exceeding the interest-free advances. The appeal was partly allowed, emphasizing the factual situation and lack of contrary evidence from the Revenue.

5. Conclusion:
The Tribunal's decision to limit the disallowance of interest expenditure to Rs. 10,25,686/- was based on the adequacy of interest-free funds and the specific investment pattern of the assessee. The appeal was partly allowed, with the order pronounced on 8th July, 2022, at Chennai.