2016 (1) TMI 857 - AT - Income Tax

Disallowance of interest expenditure under section 36(1)(iii) - interest free loan to sister concern - Held that - When the assessee had sufficient interest free funds available with it the plea of the assessee that it has advanced the interest free loan to the sister concern out of such non interest bearing funds is acceptable. Therefore in our view no disallowance of interest expenditure can be made. As far as commercial expediency is concerned it has been brought to our notice by the learned Counsel for the assessee that almost the entire product manufactured by the sister concern to which interest free loan was advanced was sold to the assessee. This very fact reveals that assessee has a business interest in the sister concern therefore advancement of interest free loan to the sister concern can be considered to be for commercial expediency. In view of the aforesaid we delete the addition made by the Assessing Officer on account of disallowance of interest expenditure - Decided in favour of assessee Disallowance under section 14A - Held that - Considering the fact that the assessee has not challenged the disallowance before the first appellate authority and a plea was taken before us by the learned counsel that the assessee did not earn any exempt income during the impugned assessment order hence no disallowance under section 14A is called for we consider it appropriate to restore the issue to the file of the Assessing Officer for examining assessee s claim and decide it in accordance with law after due opportunity of being heard to the assessee - Decided in favour of assessee for statistical purposes.

Summary

Issues involved:
1. Disallowance of interest expenditure under section 36(1)(iii).
2. Disallowance under section 14A of the Act.

Issue 1: Disallowance of interest expenditure under section 36(1)(iii):

The appeal was against an order confirming disallowance of interest expenditure under section 36(1)(iii) for the assessment year 2001-02. The assessee raised grounds related to the disallowance of interest expenditure amounting to specific sums under section 36(1)(iii). The Tribunal had directed the Assessing Officer to verify the availability of sufficient reserve and surplus to advance interest-free loans and to examine commercial expediency. The Assessing Officer disallowed the interest expenditures as the nexus between surplus funds and the interest-free advance was not established. The first appellate authority upheld the disallowance citing lack of evidence on commercial expediency.

The counsel for the assessee argued that there were surplus interest-free funds available, and thus, no disallowance should be made without proving diversion of interest-bearing funds. Referring to judicial decisions, the counsel contended that when both interest-bearing and non-interest-bearing funds are available, the presumption is that interest-free loans are given from non-interest-bearing funds. The Tribunal found that the assessee had sufficient interest-free funds, and the loans to the sister concern were for commercial expediency as evidenced by business connections. Consequently, the Tribunal allowed grounds 1 and 2, deleting the disallowance of interest expenditure.

Issue 2: Disallowance under section 14A of the Act:

The assessee challenged the disallowance of a specific amount under section 14A of the Act. The counsel for the assessee argued that since no exempt income was earned during the relevant year, no disallowance under section 14A should be made. The Departmental Representative objected, stating that the issue was not raised before the first appellate authority.

The Tribunal noted that the issue was part of previous disputes and the assessment order, despite not being raised before the first appellate authority. Considering the absence of exempt income and the relevance of the issue from the assessment order, the Tribunal decided to restore the issue to the Assessing Officer for examination and decision in accordance with the law. Thus, the ground was allowed for statistical purposes.

In conclusion, the Tribunal partly allowed the assessee's appeal, deleting the disallowance of interest expenditure under section 36(1)(iii) and restoring the issue of disallowance under section 14A of the Act to the Assessing Officer for further consideration.