2010 (9) TMI 1115 - AT - Income Tax

ITAT Mumbai allows appeal on interest expenses disallowance under section 36(1)(iii)

The appeal was allowed by ITAT, Mumbai, in a case concerning the disallowance of interest expenses under section 36(1)(iii) on advances to a sister ... - Issues involved: Disallowance of interest expenses u/s 36(1)(iii) on advances given to sister concern.The appeal was filed against the order of CIT(A)- XXV, Mumbai, for the assessment year 2006-07, challenging the disallowance of interest expenses amounting to Rs. 2,55,585 on the closing balance receivable from the sister concern.During the assessment proceedings, it was noted that the assessee, engaged in the business of manufacturing drugs and chemicals, had claimed interest expenses of Rs. 16,35,167. The assessee had advanced Rs. 18,93,225 to M/s Biogen Pharmaceuticals, in which the wife and daughter of the assessee were shareholders. The AO calculated a disallowance of interest @ 13.5% on the advances given to the sister concern, amounting to Rs. 2,55,585, which was added to the assessment. The CIT(A) upheld this decision, citing a similar disallowance made for the previous assessment year which was accepted by the assessee without appeal.The main contention raised was that when advance funds are provided out of own funds, no disallowance is warranted. The assessee argued that they had sufficient own capital of Rs. 55,14,355, against which the interest-free funds given were Rs. 18,93,225. The AR relied on judgments of the Hon'ble Supreme Court to support this argument.The ITAT, Mumbai, examined whether the interest claimed was disallowable when interest-free loans were given out of own funds. Referring to precedents, it was established that if an assessee has sufficient interest-free funds from capital reserves and other sources not related to business to cover interest-free advances, no disallowance is warranted. In this case, as the assessee had enough own funds to cover the interest-free loans given, the addition of Rs. 2,55,585 on account of interest expenses was deleted.Therefore, based on the above analysis, the appeal of the assessee was allowed, and the addition of Rs. 2,55,585 towards interest expenses was deleted.