2017 (1) TMI 105 - AT - Income Tax

Disallowed interest deduction on borrowed capital upheld despite appellant's arguments

The appellant contested the disallowance of interest paid on borrowed capital to related parties under section 36(1)(iii) of the Income-tax Act. Despite ... Disallowance made under section 36(1)(iii) - interest paid on borrowed capital on account of alleged interest free advance given to related parties - Held that:- In the facts and circumstances of the present case because of direct nexus between the OD limits raised by the assessee and its direct utilization for making interest free advances to Shri R.C. Khinvasara, the interest relatable to the said advances merits to be disallowed in the hands of assessee. Accordingly, the disallowance of interest paid on borrowed capital on account of alleged interest free advance given to related parties is upheld in the hands of assessee. Since direct nexus is established between interest free advances made by the assessee out of interest bearing funds, there is no merit in the reliance placed upon by the learned Authorized Representative for the assessee on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT). - Decided against assessee Issues:Disallowance of interest paid on borrowed capital due to alleged interest-free advances to related parties.Analysis:1. The appellant contested the disallowance of Rs. 6,53,489/- on interest paid on borrowed capital to related parties.2. The appellant argued that the Commissioner (Appeals) erred in not appreciating the facts and sustaining the addition.3. The appellant sought deletion of the addition and reduction of income accordingly.4. The main issue pertained to the disallowance under section 36(1)(iii) of the Income-tax Act amounting to Rs. 6,53,489/-.5. The Assessing Officer noted that the appellant had given interest-free advances to family members from the Cash Credit Account, leading to the disallowance of interest expenditure.6. The CIT(A) allowed the claim for business advance to a related party but upheld the disallowance concerning the advance to another related party.7. The appellant challenged the order of the CIT(A) in appeal.8. The appellant's representative argued that the interest-free advances were made from capital funds, thus contesting the disallowance.9. The Revenue's representative supported the lower authorities' decision based on evidence of interest-free payments from the Cash Credit Account.10. The issue revolved around the deduction of interest expenditure on the overdraft account used by the appellant for interest-free advances.11. The Assessing Officer analyzed the appellant's funds flow position, highlighting the source of assets and loans, leading to the disallowance.12. The disallowance was upheld due to the direct nexus between the overdraft and interest-free advances, as per section 36(1)(iii) of the Act.13. The appellant's representative relied on a Bombay High Court ruling regarding the availability of interest-free funds from capital.14. However, the Tribunal dismissed the appeal, emphasizing the direct link between interest-free advances and interest-bearing funds used, justifying the disallowance.15. The Tribunal upheld the CIT(A)'s decision, resulting in the dismissal of the appellant's appeal.16. The appeal was officially dismissed on August 26, 2016.