2019 (1) TMI 1664 - AT - Income Tax

Tribunal Upholds Deletion of Rs. 91.6L Interest Disallowance; Assessee's Sufficient Interest-Free Funds Confirmed.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 91,60,470/- related to the disallowance of ... Disallowance of interest expenses u/s.36(1)(iii) - assessee has not submitted any documentary evidence to prove that interest free funds were available with it at the time(date) when the amounts were advanced to its sister concerns - CIT-A deleted the addition - HELD THAT:- CIT(Appeals) has passed his decision on both factual matrix as well as judicial pronouncement in the case of CIT Vs. Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] as held that where the assessee had adequate interest free funds by way of proprietary capital or by way of interest free deposit for customers, there is an inference that borrowed funds are not diverted for non business purposes. In such circumstances there can be no disallowances. In the case of CIT Vs. Neelkanth Systhetics and Chemicals P. Ltd. [2009 (2) TMI 480 - BOMBAY HIGH COURT] has held that where the loan was taken to repay the liability of the sister concerns, interest of the same is to be allowed on ground of commercial expediency. Furthermore, it is observed that the Assessing Officer could not obtain any details and analyze the same while deciding the issue against the assessee. Accordingly, we do not find any infirmity in the findings of the Ld. CIT(Appeals) and relief provided to the assessee is, therefore, sustained. Hence, grounds raised by the Revenue are dismissed. Issues Involved:1. Deletion of addition of Rs. 91,60,470/- made on account of disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act.2. Non-appreciation of the fact that the assessee had already made investments in fixed assets, other loans, and advances, thus not having any owned/interest-free funds to be given as loans to its subsidiaries and a partnership firm.Detailed Analysis:1. Deletion of Addition of Rs. 91,60,470/- under Section 36(1)(iii):The primary issue in this case revolves around the deletion of the addition of Rs. 91,60,470/- made by the Assessing Officer (AO) on account of disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act. The AO had disallowed the interest expenses, claiming that the assessee had failed to establish that the funds were utilized for the purpose of its business. The AO reasoned that the interest on borrowed money is only deductible if it is for business purposes, and since the assessee had given interest-free loans to its subsidiaries, the proportionate interest attributable to such loans should be disallowed.During the appellate proceedings, the CIT(A) observed that the assessee had adequate interest-free funds and relied on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utility and Power Ltd., which held that if an assessee has sufficient interest-free funds, it can be inferred that borrowed funds are not diverted for non-business purposes. The CIT(A) noted that the AO did not examine the accounts or the notes provided by the assessee, which indicated that the advances to group companies were made out of capital and not borrowed funds.The CIT(A) further cited several judicial pronouncements, including the Supreme Court's decision in S A Builders Ltd. Vs. CIT, which emphasized the concept of commercial expediency. The CIT(A) concluded that the disallowance made under Section 36(1)(iii) was not justified and deleted the entire addition of Rs. 91,60,470/-.2. Non-Appreciation of Assessee's Investments and Funds:The second issue raised by the Revenue was that the CIT(A) erred in not appreciating that the assessee had already made investments in fixed assets, other loans, and advances, and thus did not have any owned/interest-free funds to provide as loans to its subsidiaries and a partnership firm. The AO had contended that the assessee had a significant interest burden and had failed to justify the business purpose or commercial expediency of the interest-free loans given to its related parties.In response, the CIT(A) noted that the assessee had sufficient interest-free surplus balance and that the loans availed from banks were specifically for vehicle purchases, with funds directly disbursed to vendors. The CIT(A) emphasized that the AO did not consider the detailed submissions and charts provided by the assessee, which demonstrated that the advances were made out of the assessee's own funds and not borrowed funds. The CIT(A) also highlighted the commercial expediency of the advances, which were made to support the business operations of the subsidiaries and fulfill contractual obligations.The Tribunal, after perusing the case records and analyzing the facts and circumstances, agreed with the CIT(A)'s findings. It upheld that the CIT(A) had based his decision on both the factual matrix and judicial pronouncements, including the Bombay High Court's ruling in CIT Vs. Reliance Utilities and Power Ltd. The Tribunal found no infirmity in the CIT(A)'s findings and sustained the relief provided to the assessee.Conclusion:The Tribunal dismissed the appeal of the Revenue, sustaining the CIT(A)'s decision to delete the addition of Rs. 91,60,470/- made on account of disallowance of interest expenses under Section 36(1)(iii). The Tribunal concurred with the CIT(A) that the assessee had sufficient interest-free funds and that the advances to subsidiaries were made for business purposes, thereby justifying the deletion of the disallowance. The appeal of the Revenue was dismissed, and the order was pronounced on January 23, 2019.