2019 (2) TMI 1704 - AT - Income Tax

Disallowing interest u/s 36(1)(iii) - HELD THAT - On records including the details of own funds and details of advances. We find that the CIT(A) has recorded findings of facts that loans and advances to directors were Rs. 1, 32, 29, 609/- advances for business purposes were Rs. 33, 55, 861/- such as advances to suppliers for factory plot and advances to staff and the remaining amount of advances represented the advances to various govt. authorities. CIT(A) has recorded a finding of facts to this effect and sustained the additions on Rs. 1, 22, 92, 377/- @14% by excluding out the advances to directors of Rs. 1, 32, 29, 609/- advance given to Reliable Infra Ltd Rs. 9, 37232/-for business purpose. CIT(A) has accepted the contentions of the assessee that the interest free advances on which disallowance of interest is to be made are to the tune of Rs. 1, 22 92, 377/-. We find merit in the arguments of assessee that own funds were Rs. 1, 58, 40, 305/- as the balance Sheet whereas the interest free advances are only Rs. 1, 22, 92, 377/- and therefore presumption is that no disallowance u/s 36(1)(iii) of the Act can be made as the interest free funds were more than the amount of advances given free of interest which is supported by the decision of the Hon ble Bombay High Court in the case of CIT Vs Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT . We therefore following the ratio laid down by the Jurisdictional High Court set aside the order of CIT(A) and direct the AO to delete the addition as made u/s 36(1)(iii) - Appeal of the assessee is allowed.

Summary

Issues:
Confirmation of addition of Rs. 17,58,421 as disallowance of interest u/s 36(1)(iii) of the Act.

Analysis:

Issue 1: Disallowance of interest u/s 36(1)(iii) of the Act

The Assessing Officer (AO) noted that the assessee had advanced interest-free loans and advances to related parties and others while borrowing funds on which interest was paid. The AO concluded that interest-bearing funds were diverted for interest-free loans, leading to a disallowance calculation of Rs. 27,70,713. The Commissioner of Income Tax (Appeals) [CIT(A)] partly sustained the addition at Rs. 17,58,421, considering various loans and advances made by the assessee. The CIT(A) observed that certain advances were for business purposes, and based on the details provided, restricted the disallowance to interest-free advances of Rs. 1,22,92,377 at 14% and Rs. 937,232 at 4%, totaling Rs. 17,58,421.

Issue 2: Assessment of interest-free advances

The CIT(A) examined the details of loans and advances, distinguishing between advances for business purposes and those given to directors and associates. The CIT(A) found that interest-free advances not for business amounted to Rs. 1,32,29,609, out of which interest was charged on a portion. The CIT(A) accepted the assessee's contention that the interest-free advances subject to disallowance were Rs. 1,22,92,377. The CIT(A) also considered the balance sheet figures of own funds and interest-free advances, concluding that no disallowance under section 36(1)(iii) could be made as the interest-free funds exceeded the advances given free of interest. Citing a Bombay High Court decision, the CIT(A) directed the AO to delete the addition under section 36(1)(iii).

Conclusion

The Tribunal allowed the appeal of the assessee, setting aside the CIT(A)'s order and directing the AO to delete the addition made under section 36(1)(iii) of the Act. The decision was based on the finding that the interest-free funds exceeded the interest-free advances, in line with the Bombay High Court's precedent.