2020 (11) TMI 857 - AT - Income Tax

ITAT rules in favor of assessee, overturns disallowance under section 36(i)(iii) of Income Tax Act

The ITAT ruled in favor of the assessee, deleting the disallowance under section 36(i)(iii) of the Income Tax Act, 1961. The ITAT found that the assessee ... Disallowance u/s. 36(i)(iii) - interest expenditure in respect of interest free advances/payments made by the assessee to different parties - HELD THAT:- The issue is squarely covered by the various decisions of the High Courts as well as of the apex court of the country holding that if the assessee is possessed of sufficient own interest free funds to meet the investments/interest free advances, then, under the circumstances, presumption will be that interest free advances/investments have been made by the assessee out of own funds/interest free funds. Reliance in this respect can also be placed on the decision of the Hon'ble Supreme Court in the case of 'Hero Cycles (P) Ltd. [2015 (11) TMI 1314 - SUPREME COURT ] and in the case of 'CIT (LTU) Vs. Reliance Industries Ltd. [2019 (1) TMI 757 - SUPREME COURT] - Thus, as per the settled law no disallowance u/s. 36(i)(iii) of the Act is warranted on this issue. The disallowance made by the AO on this issue is ordered to be deleted. The issue is accordingly allowed in favour of the assessee. Issues:Disallowance made under section 36(i)(iii) of the Income Tax Act, 1961 regarding interest expenditure on interest-free advances.Analysis:The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance made under section 36(i)(iii) of the Income Tax Act, 1961. The Assessing Officer disallowed expenses amounting to Rs. 24,83,432 related to bank charges, processing fees, and bank interest, citing interest-free advances made by the assessee to various parties not for business purposes. The assessee contended that the advances were made for business needs and commercial expediency. The CIT(A) upheld the disallowance, stating that the advances might have been made using interest-bearing funds. However, the ITAT found that the assessee had sufficient own funds to cover the interest-free advances, relying on established legal precedents. Notably, the ITAT referred to judgments such as 'Hero Cycles (P) Ltd. Vs. CIT' and 'CIT (LTU) Vs. Reliance Industries Ltd.' to support its decision. Consequently, the ITAT ruled in favor of the assessee, deleting the disallowance under section 36(i)(iii) of the Act. The ITAT set aside the CIT(A)'s order, allowing the appeal of the assessee.