2025 (7) TMI 672 - AT - Income Tax

Interest expenditure disallowance under section 36(1)(iii) deleted when funds advanced to sister concern at lower rates

ITAT Delhi allowed the assessee's appeal regarding disallowance under section 36(1)(iii) for interest expenditure. The assessee had availed credit ... Disallowance u/s 36(1)(iii) of interest expenditure - assessee had availed credit facility and term loans carrying interest @ 13.5% and charged interest @ 8% only is for sister concern whilst advancing them an amount - HELD THAT:- We conclude in light of cases Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] as well as South Indian Bank Ltd. [2021 (9) TMI 566 - SUPREME COURT] that necessary presumption which would arise in such an instance would be that of advancement of interest free funds only to the assessee’s sister concern. No reason to sustain the impugned section 36(1)(iii) disallowance which is directed to be deleted in very terms. Assessee appeal allowed. The ITAT Delhi, in the appeal for AY 2017-18, addressed the disallowance under section 36(1)(iii) of interest expenditure amounting to Rs. 90,20,116/-, upheld by the CIT(A)/NFAC on the ground of diversion of interest-bearing funds to group concerns for non-business purposes. The assessee contended that while loans were availed at 13.5% interest, only 8% interest was charged to the sister concern on advances totaling Rs. 16.40 crores. The balance sheet revealed non-interest bearing funds including share capital and reserves of Rs. 50.90 crores, exceeding the advances made. Citing *CIT vs. Reliance Utilities and Power Ltd.* (2009) 313 ITR 340 (Bom) and *South Indian Bank Ltd. vs. CIT* [2021] 438 ITR 1 (SC), the Tribunal held that the presumption must be that interest-free funds were advanced to the sister concern. Consequently, the section 36(1)(iii) disallowance was deleted. The appeal was allowed accordingly.