2020 (10) TMI 408 - AT - Income Tax

Disallowance of interest on interest-free advances to related concerns upheld; importance of evidence emphasized

The Tribunal upheld the disallowance of interest on interest-free advances to related concerns, emphasizing the need for evidence of utilizing ... Disallowance of interest in respect of interest free advances given to related concerns - loans and advances to relatives have decreased during the year - appellant has not charged any interest on the loans and advances as the appellant has sufficient interest free capital and trade creditors for making the interest free advance to the above parties - Whether A.O. has not established the direct nexus between interest bearing loan taken and interest free loan given? - HELD THAT:- As fund flow statement will reflect such a position of interest free funds which are available to be utilized and which the assessee has failed to furnish during the appellate proceedings before him. Even during the course of present proceedings, the assessee has not furnished any fund flow statement and therefore, the said findings of the CIT(A) remain uncontroverted and we are thus not inclined to interfere with the same and thus, the contentions so advanced by the ld AR cannot be accepted as the same remain unsubstantiated. Regarding the contention of the AR that other advances to related concerns are in nature of trade debtors and the matter has not been examined by the AO, the matter is set-aside to the file of the AO with a direction to verify the said claim and where, on verification, it is found that such transactions are in course of the assessee’s business, the same is directed to be excluded while working out the disallowance of interest. Issues involved:- Disallowance of interest on interest-free advances to related concerns- Charging of interest under various sections of the Act- Withdrawal of interest under section 244A of the ActIssue 1: Disallowance of interest on interest-free advances to related concernsThe appellant contested the disallowance of interest amounting to Rs. 7,98,401 on interest-free advances given to related concerns. The appellant argued that the advances were made from their own funds and interest-free trade creditors, not borrowed funds. The appellant highlighted their sufficient interest-free capital and trade creditors to support the interest-free advances. The Revenue, however, contended that the advances were not made from interest-free capital as it was invested in fixed assets, and interest-free debtors exceeded interest-free creditors. The Tribunal analyzed the availability of free funds at the time of making advances, emphasizing the need to consider free cash and bank balance. It was noted that the balance sheet figures at year-end did not reflect the availability of free funds at the time of making advances. The Tribunal upheld the disallowance of interest, emphasizing the lack of evidence showing the advances were made from interest-free funds.Issue 2: Charging of interest under various sections of the ActThe appellant denied the liability of charging interest under sections 234A, 234B, 234C, and 234D of the Act, as well as the withdrawal of interest under section 244A. The Tribunal dismissed this issue as consequential, leading to its dismissal without further adjudication.Issue 3: Withdrawal of interest under section 244A of the ActThe issue of withdrawal of interest under section 244A was also deemed consequential by the Tribunal and was dismissed without separate adjudication.In conclusion, the Tribunal upheld the disallowance of interest on interest-free advances to related concerns, emphasizing the need for evidence of utilizing interest-free funds. The issues regarding charging interest under various sections and withdrawal of interest under section 244A were dismissed as consequential. The appeal was disposed of with directions to exclude certain transactions while calculating the disallowance of interest, highlighting the importance of providing adequate evidence to support claims during proceedings.