Tribunal directs deletion of addition for interest on interest-free loans to sister concerns

The Tribunal allowed the appeals of the assessee, directing the AO to delete the addition made by disallowing the proportionate interest on the interest-free loans extended to sister concerns for all relevant assessment years. The decision was pronounced on May 8, 2019, in Chennai.

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Issues:
Disallowance of interest on borrowed funds extended as interest-free loans to sister concerns for assessment years 1997-98, 1998-99, and 2004-05.

Analysis:
1. The assessee appealed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of interest on borrowed funds extended as interest-free loans to sister concerns. The Assessing Officer (AO) disallowed the interest amount for the relevant assessment years. The Tribunal remitted the matter back to the AO to examine the cash flow statement but the AO was not satisfied with the liquidity position of the company based on various balances.

2. The appellant argued that its own funds exceeded the loan amount, and there was no prohibition under the Act to use such funds for business purposes. The appellant contended that the disallowance was not supported by any statutory provision. The Departmental Representative (DR) supported the orders of the Revenue Authorities, emphasizing the need for cash liquidity despite the appellant's own funds exceeding the loan amount.

3. The Tribunal observed that the appellant had consistently used its own funds for business purposes and had extended interest-free loans to sister concerns. The Tribunal cited precedents where interest was allowed if funds were available, whether interest-free or borrowed. The Tribunal highlighted that the appellant's own funds exceeded the interest-free loan amount, following decisions of higher courts and previous Tribunal rulings.

4. The Tribunal emphasized that when funds are mixed, there is a presumption that interest-free loans are sourced from interest-free funds first. The Tribunal directed the AO to delete the disallowance of interest towards interest-free loans for all relevant assessment years, as the appellant's own funds exceeded the loan amount. The Tribunal distinguished the cited case by the DR, as it lacked findings regarding the appellant's own funds exceeding the loan amount.

5. Consequently, the Tribunal allowed the appeals of the assessee, directing the AO to delete the addition made by disallowing the proportionate interest on the interest-free loans extended to sister concerns for all relevant assessment years. The decision was pronounced on May 8, 2019, in Chennai.

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