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2022 (2) TMI 478 - AT - Income TaxAddition u/s 36(i)(iii) - interest on advances made - Disallowance of interest made on the opening balance/amount - HELD THAT:- As stated by the Ld. DR, and rightly so, as the assessee had during the year under consideration continued to pay interest on the interest bearing loans raised from the banks in the preceding years, therefore, there being a direct nexus between the outstanding balance of the interest free loans that were advanced to the aforementioned party and the said interest bearing funds, there can be no justification in not disallowing the interest corresponding to such interest free advance during the year under consideration, for the reason, that the amount of such advance was merely in the form of “Opening balance” and had not been given during the year under consideration. As part of the interest expenditure claimed as deduction by the assessee during the year under consideration pertained to the interest bearing loans that were raised by the assessee in the immediately preceding year and, continued as such during the year under consideration, therefore, we are unable to comprehend as to on what basis the assessee is claiming that no disallowance of the interest expenditure was called for with respect to the opening balance of the outstanding interest free advance that was given to the aforementioned party. Accordingly, we are unable to persuade ourselves to subscribe to the aforementioned claim of the assessee, and thus, reject the same. Whether no disallowances u/s 36(1)(iii) is called for to the extent the assessee was found to be in possession of interest free funds during the year under consideration and as the assessee had funds in the form of capital deployed by the partners on which interest was being paid @3% per annum, therefore, the disallowances, if any, u/s 36(1)(iii) of the Act was to be restricted in the backdrop of availability of the aforementioned amount of concessional interest bearing funds to 3% p.a. and not 8% p.a as worked out by the AO - As interest free funds are available with the assessee, then, a presumption would arise that the investments made were from its interest free funds. See RELIANCE UTILITIES & POWER LTD. [2009 (1) TMI 4 - BOMBAY HIGH COURT] As the assessee was admittedly having interest free funds of ₹ 16,99,632.68 i.e. unsecured loans raised from family members, therefore, no disallowance to the said extent qua the loan/advances given by the assessee to M/s. Khaira Trading company was called for - We, thus, vacate the disallowance of the interest expenditure u/s 36(1)(iii) qua the aforementioned amount. As regards the balance amount of the interest free advance given by the assessee firm to the aforementioned party, viz. M/s. Khaira Trading Company i.e. ₹ 37,00,367.32 [₹ 54,00,000/- (-) ₹ 16,99,632.68], we are of the considered view that as the assessee firm had sufficient amount of capital of the partners of ₹ 1.54 crore on which interest was being paid @3% per annum, therefore, the disallowance u/s 36(1)(iii) with respect to the aforesaid balance of amount of ₹ 37,00,367.32 was to be restricted to 3% per annum and not 8% per annum as had been worked out by the AO. We, thus, in terms of our aforesaid deliberations modify the disallowance worked out by the AO u/s 36(1)(iii) of the Act.Grounds of appeal Nos. 2 to 3 are partly allowed
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