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TMI Blog2017 (3) TMI 746X X X X Extracts X X X X X X X X Extracts X X X X ..... more. Once this is established no disallowance under section 36(1)(iii) of the Act would be warranted against interest paid on business borrowings for reason of having given interest free loans. Thus, while the Tribunal has found 39,45,705/- were available by way of interest free advance with the assessee and that disallowance under Section 36(1)(iii) of the Act, commensurate to such deposit was not warranted, yet there is a total lack of any finding as to the amount of interest free loan given by the assessee in the previous year relevant to the assessment year 2010-11, both by the Tribunal and also by the CIT (Appeals). We are therefore of the view that the questions of law raised in the memo of appeal deserve to be answered partially in favour of the assessee to the extent that in view of the finding recorded by the Tribunal as to availability of 39,45,705/- by way of interest free advance, the Tribunal was further required to record a finding as to the amount interest free loan given by the assessee in the previous year relevant to the assessment year 2010-11. X X X X Extracts X X X X X X X X Extracts X X X X ..... ree advances available with it and that it also had available ₹ 1.80 crores by way of partner's capital. However, the assessing officer rejected this explanation with the observation that the assessee had failed to substantiate it. Upon appeal to the Commissioner, the assessee further clarified that out of ₹ 92.75 lacs standing in its books as interest free loans given by it, it had, in the previous year relevant to the assessment year 2010-11, given out only ₹ 75,000/- and that the balance of ₹ 92 lacs had been given out as interest free loans in earlier years prior to previous year relevant to A.Y. 2010-11. Also, the assessee further clarified that in the previous year relevant to the assessment year 2010-11 it had available with it ₹ 39,45,705/- by way of interest free advances from customers that were sufficient to give a loan of ₹ 75,000/- in that year. It was thus explained that in the previous year relevant to the assessment year 2010-11 the only interest free loan given by it was of ₹ 75,000/- from non interest bearing advances available with the assessee to the tune of ₹ 39,45,705/-. As such no part of the interest bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT (Appeals) however, rejected the claim made by the assessee by relying on a Division Bench judgment of this Court in the case of Commissioner of Income Tax-I, Lucknow Vs. Sahu Enterprises (P.) Ltd. (2013) 352 ITR 8, wherein as the CIT (Appeals) has noted, it has been held "The test to be applied in such cases is not the source of the funds but the purpose for which the loans were extended." Thus the CIT (Appeals) was of the view that it would be irrelevant for the purpose of claim made under Section 36 (1) (iii) of the Act to examine whether the assessee had his own funds available from which it had given interest free loans and that it would be relevant for the assessee to establish business purpose for making such a loan. Further, the CIT (Appeals), in exercise of his powers to enhance the assessment, issued directions to the Assessing Officer to compute the interest by applying the product computation method taking the period during the year and consideration for which loan was given to the sister concern remained outstanding and the rate of interest on which interest was paid by the assessee (appellant) firm on the borrowed monies. Upon further appeal, the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as on 31.03.2010, which totaled ₹ 92.75 lacs which the assessee probably did not bifurcate and it did not show to the Assessing Officer as to what part of that amount it had advanced in the previous year relevant to the assessment year 2010-11. While before the CIT (Appeals) the assessee did give separately, full details of interest free loans given by it, during the previous year relevant to A.Y. 2009-10 as also 2010-11, the CIT (Appeals) after recording the submission of the assessee did not record any finding on the issue but disallowed the grounds of appeal raised before him in view of the Division Bench Judgment of this Court in CIT Vs. Sahu Enterprises (P.) Ltd. (supra). In that case it was an admitted fact that in the relevant year the assessee did not have available with it own funds for the purpose of giving interest free loans and that interest free loans had been given by that assessee to its Directors and their family members for their personal use from out of its interest bearing borrowings. In such circumstances, this Court had concluded that the test of commercial expediency was not satisfied and therefore disallowance of interest under Section 36 (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,38,986/- to his family members, that by itself could not be put to doubt and on which the interest was disallowed under Section 36 (1) (iii) of the Act. 11. The AO added ₹ 1,78,85,290/- as interest on the ground that the amount was not advanced by way of any business expediency. The Tribunal, however, held that where the amount was not advanced from the business, but was the capital of the assessee, he could have advance to his family members. 12. The question no.5 is also concluded by findings of fact recorded by the Tribunal, which is the final court of fact and thus does not arise for consideration of the Court." Also, in the case of CIT Vs. M/S Appolo Trade Links, Moradabad (supra) this Court had held as under:- "This Court in the case of Commissioner of Income Tax, Bareilly and another Versus M/s Radico Khaitan Ltd., Rampur reported in 2005 UPTC, 82 had considered this aspect and has held that where the amount of any interest free loan is sufficiently covered with the non interest bearing fund available with the assessee, the question of disallowance of interest on borrowed fund does not arise. This view has been followed by this Court in Income Tax Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallow interest expenditure under section 36(1)(iii), if it is established as a fact that interest free loans were given by the assessee from its own funds or from funds which are not part of its interest bearing borrowings. To this extent the order of the CIT appeals is patently wrong. Coming to the order of the Tribunal we find that the Tribunal has misdirected itself and also not decided the issue in light of the law expounded by the Supreme Court in Hero Cycles Private Ltd. Vs. CIT Central Ludhiana 2015 (379) ITR 347. In fact, the Tribunal has returned what we consider only half a finding necessary to decide the issue as it has directed the Assessing Officer to grant benefit of entire amount of ₹ 39,45,705/- that was available with the assessee by way of interest free advance from customers. The Tribunal has thus, by necessary implication, accepted the claim made by the assessee - that ₹ 39,45,705/- was available with the assessee by way of interest free advance in the relevant period. However, the Tribunal has failed to record any finding on the second part of the claim made by the assessee namely that in the previous year relevant to the assessment year 2010-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or else face disallowance of interest expenditure on borrowed funds under section 36(1)(iii) of the Act. Such a rule, if accepted, would actually be a prescription against giving of any interest free sum to any one for any non-business purpose and may in fact curb the human nature to help another person in need of money by giving interest free loan on a return-when-able basis. There is neither any legal or other basis for such a rule or principle which we observe would be unreasonable and impractical and wholly undesirable to accept. Each assessment year being a separate unit, the disallowance of interest expenditure in such circumstances cannot be based on the closing balance of interest free loan in a given year. Rather, the Assessing Officer may examine the amount of interest free loan given in the previous year relevant to the assessment year in question and only if the Assessing Officer is satisfied that the assessee had not available to it, sufficient own funds to give such a loan in that year he may invoke section 36(1)(iii) of the Act and disallow such interest expenditure as may be warranted and not otherwise. An assessee who had available to him sufficient own funds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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