2024 (7) TMI 1230 - AT - Income Tax

Disallowance being interest at 12% of interest free advances - Advances was given to 5 persons without charging any interest - HELD THAT - As submitted that the advances were subsequently received back by the appellant. It was also submitted that for the last three years, khandsary business is closed. In view of the above facts, we are of the considered view that loans and advances were given for business purposes. It is the assessee who decides as to how the business should be done and when expansions or modernization should be undertaken. Such a business decision cannot be questioned by any authority. Once it is held that the advances were for business purposes, non-installation of the machinery or renovation in the subsequent period due to non-viability cannot obliterate the purpose of business. The assessee decided not to go-forward with its plan of new machinery and renovation due to bad market condition. Such business decision cannot be a ground to disallow consequential expenditure. Hence, appellant is liable to succeed on the subject issue. Assessee had its own interest free capital which was more than the interest free advances - The Hon ble jurisdictional High Court in case of Gujarat Narmada Valley Fertilizers Co.Ltd. 2012 (8) TMI 1161 - GUJARAT HIGH COURT held that where there was sufficient fund available with the assessee-company on which no interest was paid and out of which loans and advances to associate companies could be made, AO was not justified to disallow the claim of interest on borrowed funds. In the present case, we find that the assessee had its own share capital of Rs. 1,63,55,749/ - whereas the loans and advances given were only Rs. 95,70,601/-. Hence, the assessee had adequate interest free funds with it to make such advances. Therefore, the disallowance is not permissible in view of the decisions of Gujarat Narmada Valley Fertilizers Co. Ltd. 2012 (8) TMI 1161 - GUJARAT HIGH COURT and R L Kalthia Enggineering Auomobilies (P.) Ltd. 2013 (2) TMI 754 - GUJARAT HIGH COURT Accordingly, the ground raised by assessee is allowed.

Summary

Issues:
Disallowance of interest at 12% on interest-free advances.

Analysis:
The appeal concerns an order passed under section 250 of the Income-tax Act, 1961, for the assessment year 2014-15. The assessee contested the disallowance of Rs. 11,48,472, representing interest at 12% on interest-free advances. The Assessing Officer (AO) disallowed the amount, asserting that interest-bearing funds were diverted to interest-free loans, thus not used for business purposes. The CIT(A) upheld the disallowance, emphasizing the lack of evidence proving the source of interest-free loans and advances. The appellant argued that the advances were for business purposes, primarily for renovation and machinery installation. The Tribunal noted that the advances were indeed for business use, and the decision not to proceed with the planned investments due to market conditions did not negate the business purpose. Additionally, the assessee had sufficient interest-free capital to cover the advances, aligning with judicial precedents. Consequently, the Tribunal allowed the appeal, ruling that the disallowance was unwarranted based on the available funds and the purpose of the advances.

The assessee's contention revolved around the business nature of the interest-free advances, primarily for machinery installation and renovation. The AO's disallowance was based on the diversion of interest-bearing funds to interest-free loans, which the CIT(A) upheld due to insufficient evidence on the source of the advances. However, the Tribunal found merit in the appellant's argument that the advances were indeed for business purposes, despite not materializing due to market conditions. Moreover, the Tribunal highlighted the presence of adequate interest-free capital, exceeding the amount of advances, in line with relevant case law. Consequently, the disallowance was deemed unjustified, and the appeal was allowed.

The Tribunal's decision hinged on the business purpose of the interest-free advances and the availability of ample interest-free capital to cover the loans. Despite the non-execution of planned investments, the Tribunal recognized the initial intent and upheld the appellant's position that the advances were business-related. By citing relevant case law, the Tribunal concluded that the disallowance was unwarranted given the adequacy of interest-free funds. As a result, the appeal was allowed, overturning the previous disallowance of interest on the interest-free advances.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeal and overturning the disallowance of interest on the interest-free advances. The decision was based on the business purpose of the advances, the availability of ample interest-free capital, and alignment with established case law principles.