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of <h1>ITAT emphasizes link between interest-free funds & borrowing in overturning interest expense addition.</h1> <h3>Kloechner Desma Machinery Pvt. Ltd. Versus ACIT (OSD) -I,</h3> Kloechner Desma Machinery Pvt. Ltd. Versus ACIT (OSD) -I, - TMI Issues:- Disallowance of interest expenses of Rs. 10,88,824Analysis:1. The appellant, engaged in manufacturing, incurred interest expenses of Rs. 1,81,47,080 on loans but also provided interest-free loans. The AO disallowed a portion of interest expenses due to interest-free loans. The CIT(A) upheld the disallowance, stating interest on such advances is not for business purposes. The appellant failed to prove the nexus of interest-free funds with lending to employees. The disallowance was confirmed.2. The appellant argued before ITAT that it had interest-free funds of Rs. 14.15 crore, citing a Co-ordinate 'B' Bench decision and a Bombay High Court case. The ITAT noted the AO did not establish a link between interest borrowing and interest-free advances. Referring to the Bombay High Court case, ITAT held that if interest-free funds are sufficient to cover investments, it can be presumed that investments are from interest-free funds. As the appellant had interest-free funds, the addition was deleted, allowing the appeal.3. The ITAT's decision was based on the lack of nexus between interest-free advances and borrowing, following the Bombay High Court's presumption principle. The appellant's argument regarding interest-free funds was considered valid, leading to the deletion of the addition. The ITAT differentiated this case from precedents where disallowances were justified due to lack of commercial expediency. The appeal was allowed in favor of the assessee.4. Ultimately, the ITAT allowed the appeal, emphasizing the presence of interest-free funds and the application of the Bombay High Court's presumption principle. The decision highlighted the importance of establishing a clear link between borrowing and interest-free advances, leading to the deletion of the addition of interest expenses. The appellant's argument regarding interest-free funds was pivotal in overturning the disallowance.
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