2025 (1) TMI 184 - AT - Income Tax

Disallowance u/s 36(1)(iii) - interest free advances given by assessee - HELD THAT - CIT(A) has given finding that the prudent business man will never give such interest free advances, the fact remains that these are for a purchase of material and it was for conducting the business of the assessee and therefore, the same cannot be stated as certain interest free loan / advances was not rightly disallowed by the AO u/s 36(1)(iii). In fact, the opening balance of these advances was submitted by the assessee in the details and therefore, the contention of the A.R. that such funds were not diverted towards interest free advances appears to be justifiable from the records i.e. Tax Audit Report, Financial Statements and the evidence in support of these advances given to the related parties. Thus, the disallowance made by the AO as well as confirmed by the CIT(A) is not justifiable in light of the decision of CARGILL GLOBAL TRADING (P.) LTD. 2011 (2) TMI 209 - DELHI HIGH COURT and SA BUILDERS LTD. VERSUS COMMISSIONER OF INCOME-TAX 2006 (12) TMI 82 - SUPREME COURT . Thus, the appeal of the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

Whether the disallowance of Rs. 16,83,705/- under Section 36(1)(iii) of the Income Tax Act, pertaining to LC discounting charges, was justified.
Whether the interest free loans and advances given by the assessee should lead to disallowance of interest expenses under the same section.
Whether the delay of 224 days in filing the appeal should be condoned due to the medical exigencies faced by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of LC Discounting Charges

Relevant Legal Framework and Precedents: The disallowance was made under Section 36(1)(iii) of the Income Tax Act, which deals with the allowance of interest on borrowed capital for business purposes. The assessee relied on precedents from the Apex Court in S.A. Builders Ltd. vs. CIT and the Delhi High Court in CIT vs. Cargill Global Trading Pvt. Ltd.
Court's Interpretation and Reasoning: The Tribunal found that the advances were business-related, specifically for the purchase of materials, and not merely interest-free loans. The Tribunal noted that the opening balance of these advances was substantial and was not diverted towards interest-free advances.
Key Evidence and Findings: The assessee provided evidence through the Tax Audit Report and Financial Statements that supported the claim that the advances were for business purposes. The Tribunal found this evidence convincing.
Application of Law to Facts: The Tribunal applied the legal principles from the cited cases, concluding that the disallowance was unjustified as the advances were for business purposes and not interest-free loans.
Treatment of Competing Arguments: The Tribunal considered the arguments of the Revenue Authorities, which questioned the necessity of interest-free advances when incurring interest expenses, but ultimately found the assessee's justification more compelling.
Conclusions: The Tribunal concluded that the disallowance of Rs. 16,83,705/- was not justified, and the appeal on this ground was allowed.

Issue 2: Delay in Filing the Appeal

Relevant Legal Framework and Precedents: The Tribunal considered the principles of natural justice and the genuine reasons for delay in filing appeals.
Court's Interpretation and Reasoning: The Tribunal found the reason for delay, being medical exigencies, to be genuine and condoned the delay.
Key Evidence and Findings: The assessee presented evidence of the medical issues faced, which the Tribunal accepted as valid.
Application of Law to Facts: The Tribunal applied the principles of natural justice, allowing for the condonation of delay based on genuine hardship.
Treatment of Competing Arguments: There was no significant opposition to the condonation of delay from the Revenue Authorities.
Conclusions: The delay of 224 days in filing the appeal was condoned.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The disallowance made by the Assessing Officer as well as confirmed by the CIT(A) is not justifiable in light of the decision of Hon'ble Delhi High Court as well as the Hon'ble Apex Court in cases of CIT vs. Cargill Global Trading Pvt. Ltd. and S.A. Builders Ltd. vs. CIT respectively."
Core Principles Established: The Tribunal reaffirmed the principle that business-related advances, even if interest-free, should not automatically lead to disallowance of interest expenses if they are justified by business needs.
Final Determinations on Each Issue: The Tribunal allowed the appeal, overturning the disallowance of Rs. 16,83,705/- and condoning the delay in filing the appeal.

This judgment establishes that the mere existence of interest-free advances does not justify disallowance of interest expenses if business justification is provided and supported by evidence. Additionally, genuine reasons for delay in appeal filing, such as medical emergencies, are valid grounds for condonation.

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