2022 (12) TMI 629 - AT - Income Tax

ITAT allows appeal, stresses importance of interest-free funds in interest disallowance

The ITAT allowed the appeal for statistical purposes, emphasizing the need to examine the availability of interest-free funds in determining the ... Addition of interest on interest free advances given by the assessee - CIT-A deleted the addition - AR submitted that the assessee has interest free funds available at its disposal and hence, the benefit of availability of such interest fee funds should be allowed in computing the disallowance of interest - HELD THAT:- The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. [2019 (1) TMI 757 - SUPREME COURT] has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders’ funds, presumption gets established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. It is clear that where interest free funds are available with the assessee and there is net availability of funds, a presumption has to be drawn that the advance made for non-business purposes were advanced by such interest free funds available at the disposal of the assessee. We, therefore, setaside the impugned order and remit the matter to the file of the AO for examining the availability of interest free funds and then compute the disallowance of interest u/s.36(1)(iii) accordingly. Needless to say, the assessee will be allowed reasonable opportunity of hearing. Appeal is allowed for statistical purposes. Issues:Deletion of addition of interest on interest-free advances given by the assessee.The judgment pertains to an appeal by the Revenue against the order passed by the CIT(A), Pune-1, concerning the assessment year 2014-15. The sole issue raised in the appeal is the deletion of the addition of interest on interest-free advances given by the assessee. The assessee had paid interest on term loans, unsecured loans, and car loans but did not charge interest on a security deposit made to another company. The Assessing Officer disallowed the interest on the deposit, resulting in an addition of Rs. 3.48 crore, which was later deleted by the CIT(A). The ITAT, Pune, analyzed the case and found that the advance was given for non-business purposes, contrary to the assessee's claims. The ITAT held that the assessee had interest-free funds available and remitted the matter to the AO to reexamine the disallowance of interest based on the availability of interest-free funds, following legal precedents establishing a presumption regarding the use of such funds for non-business purposes.The ITAT observed that the assessee had advanced a significant sum to another company, not for purchasing raw material as claimed but for general facilitation of business. The ITAT noted that interest was charged in previous years, indicating non-business purposes, and found no change in circumstances to support a sudden shift to a business purpose. The ITAT disagreed with the CIT(A)'s decision to delete the addition and concluded that the advance was made for non-business purposes. The ITAT also considered the argument by the assessee's representative regarding the availability of interest-free funds and referred to legal precedents, including judgments by the Bombay High Court and the Supreme Court, establishing a presumption when interest-free funds are available with the assessee. Based on these precedents, the ITAT set aside the earlier order and directed the AO to reevaluate the disallowance of interest under section 36(1)(iii) considering the availability of interest-free funds, ensuring the assessee's right to a fair hearing.In conclusion, the ITAT allowed the appeal for statistical purposes, emphasizing the need to examine the availability of interest-free funds in determining the disallowance of interest. The judgment highlighted the legal principle that when interest-free funds are accessible to the assessee, a presumption arises regarding the utilization of such funds for non-business purposes. The ITAT's decision to remit the matter for further assessment based on the availability of interest-free funds aligns with established legal interpretations and ensures a fair evaluation of the interest disallowance issue.