Company with interest-free funds can advance to subsidiaries without deemed interest income addition

The ITAT Mumbai held that where an assessee maintains a pool of funds comprising both interest-free and interest-bearing funds, advances to subsidiaries and related parties are presumed made from interest-free funds if sufficient to cover such advances. The AO cannot question commercial wisdom but only examine whether interest-free funds are adequate. The CIT(A) found facts identical to a previous favorable tribunal decision for AY 2015-16. The tribunal confirmed the assessee had sufficient interest-free funds to cover advances to related parties, except one entity charged 9% interest. Additions for excess interest expenditure, brokerage, commission and bank charges were deleted, deciding against revenue.

---

---

Issues:
Challenge to order of CIT(A) deleting additions made by Assessing Officer for excess interest expenditure, brokerage/commission, and bank charges for assessment year 2016-17.

Analysis:
The appeal by Revenue challenges the CIT(A) order deleting additions made by Assessing Officer. The respondent-assessee, a promoter of a group of companies, filed RoI declaring income. Assessing Officer made additions towards excess interest expenditure, brokerage/commission, and bank charges. Assessee contended before CIT(A) that additions were unjustified as funds were not diverted and Assessing Officer questioned commercial expediency. CIT(A) deleted the additions, leading to the Revenue's appeal.

The CIT(A) relied on an earlier Tribunal decision for the same assessee's case in assessment year 2015-16, finding identical facts. The Revenue argued that Assessing Officer's view was reasonable, emphasizing the importance of proving no diversion of interest funds for non-business activities. The respondent-assessee supported the CIT(A)'s decision, citing availability of interest-free funds to cover advances and relying on legal precedents.

The Tribunal noted the presumption that advances to related parties are made from interest-free funds if available. It emphasized that Assessing Officer cannot question commercial wisdom and must consider if interest-free funds cover advances. While the Revenue argued against blanket reliance on previous decisions, the Tribunal found facts similar to the earlier year. It concluded that the assessee had sufficient interest-free funds to cover advances, except for specific cases, leading to the dismissal of the Revenue's appeal.

The Tribunal found no grounds for interference, dismissing the Revenue's appeal and upholding the CIT(A) order. The appeal was concluded on 16/04/2024.

---