2019 (2) TMI 2004 - AT - Income Tax

Tribunal allows interest expense appeal, dismisses exchange rate addition. Focus on interest-free funds evaluation.

The Tribunal allowed the appeal on the disallowance of interest expenses under section 36(i)(iii) of the Income Tax Act, 1961, directing a fresh ... Disallowance u/s. 36(i)(iii) - money advanced to the sister concerns - Assessee had diverted the interest bearing borrowing towards interest free loan and advances - Whether assessee had sufficient interest free funds to cover advances given to its associate concerns and no interest bearing fund was advanced to its associate concerns.? - counsel has submitted that the assessee was having total interest free funds and pleaded that no disallowance u/s.36(i)(iii) is called for - HELD THAT:- As counsel has submitted that such fact was categorically pointed out before the assessing officer and the same has not been denied by either of the lower authorities. During the course of appellate proceedings before us these contentions of the ld. counsel was not controverted by the Revenue Therefore, we are of the view that it would be appropriate to restore this issue to the file of the assessing officer to decide de-novo on the points (i) and (ii) as above after affording adequate opportunity to the assessee. Accordingly this ground of the appeal is restored to the file of the assessing officer for deciding afresh as directed above. Therefore this ground of appeal of the assessee is allowed for statistical purpose. Addition made on account of exchange rate of difference - HELD THAT:- We noticed that the assessee had not filed the impugned ground of appeal before the ld. CIT(A). We have also gone through the form No. 35 filed before the ld. CIT(A) and noticed that neither such ground of appeal reflected in the form No. 35 nor such ground of appeal was adjudicated by the Ld.CIT(A). In the light of the above fact and circumstances this ground of appeal of the assessee stands dismissed. Issues Involved:1. Disallowance of interest expenses under section 36(i)(iii) of the Income Tax Act, 1961.2. Addition made on account of exchange rate difference.Issue 1: Disallowance of interest expenses under section 36(i)(iii) of the Income Tax Act, 1961:The assessing officer disallowed interest expenses of &8377; 16,27,820 claimed by the assessee, stating that the borrowing of funds by the company was not for the purpose of business. The officer alleged that the interest-bearing borrowing was diverted towards interest-free loan and advances. The CIT(A) confirmed the disallowance for certain advances made by the assessee, including those to Bajaj Herbal Pvt. Ltd., Sai Krupa Fabric Pvt. Ltd., and Sainaih Enterprises. The assessee argued that the advances were made for business purposes out of commercial expediency, citing the S.A. Builders vs. CIT case. The assessee also highlighted that the interest expenses were on loans taken for specific business purposes, which were monitored by banks. Additionally, the assessee had substantial interest-free funds available, exceeding the interest-free advances made. The assessee relied on various case laws to support the argument. The Tribunal observed that the assessing officer and the CIT(A) did not provide clear findings on whether the assessee had sufficient interest-free funds to cover the advances to its associate concerns and if the money advanced was for the business needs of the assessee. As the contentions of the assessee were not controverted by the Revenue during the appellate proceedings, the Tribunal decided to restore the issue to the assessing officer for a fresh decision after affording adequate opportunity to the assessee. Consequently, the ground of appeal on this issue was allowed for statistical purposes.Issue 2: Addition made on account of exchange rate difference:The assessee did not raise this ground of appeal before the CIT(A), and it was not reflected in the form filed with the CIT(A) nor adjudicated upon. Therefore, the Tribunal dismissed this ground of appeal due to the lack of submission and consideration in the previous proceedings.In conclusion, the Tribunal allowed the ground of appeal related to the disallowance of interest expenses under section 36(i)(iii) for further assessment by the assessing officer. The ground of appeal regarding the addition made on account of exchange rate difference was dismissed as it was not raised or considered in the previous proceedings. The judgment emphasized the need for clear findings on the availability of interest-free funds and the purpose of advances made by the assessee, directing a fresh assessment on these aspects.