In a recent ruling, the Bangalore Bench of the Income Tax Appellate Tribunal ( ITAT ) quashed the disallowance under Section 36(1)(iii) of the Income Tax Act, 1961, on interest-free advances provided to the assessee’s sister concern.
In this case, the assessee, Deccan Charters Pvt. Ltd., is a company in the aviation services business based in Bengaluru and filed its Income Tax Returns for the assessment year ( AY ), declaring a total loss of Rs. 10,93,70,970.
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During the scrutiny proceedings, it was noted by the assessing officer ( AO ). The AO noted that the assessee had given interest-free advances to related concerns while paying interest on borrowed loans. After reviewing the details furnished by the assessee, the AO disallowed Rs. 2.56 crore under Section 36(1)(iii) of the Income Tax Act.
The assessee, who was aggrieved by the order of AO appealed before the Commissioner of Income Tax ( Appeals ) [ CIT (A) ]. The CIT(A) rejected the submissions made by the assessee that the impugned advances were extended by the assessee to its sister concern, M/s. Deccan Emerging Business Ventures Pvt. Ltd., during the financial year relevant to AY 2012-13 and upheld the decision of AO.
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The assessee approached the ITAT for relief.
The assessee contended that the advance was not given during the year under consideration and that the balance shown is the outstanding carried forward from earlier years.
The counsel on behalf of the assessee contended that the outstanding advance to the sister concern has decreased from Rs. 38.47 crore in 2012 to Rs. 22.54 crore in 2018, making the disallowance under Section 36(1)(iii) of the Income Tax Statute on grounds that insufficient own funds were not available was not tenable.
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It was vehemently argued by the counsel on behalf of the respondent that the assessee cannot take shelter on the ground that when the advance was extended, the assessee had sufficient own funds.
The ITAT bench found merit in the assessee’s contention that no new advance was extended to the sister concern.
The ITAT bench, comprising George George K ( Vice President ) and Padmavathy S. ( Accountant Member ) allowed the appeal filed by the assessee and held that the AO was incorrect in making the disallowance under Section 36(1)(iii) of the Income Tax Act, 1961, and directed the AO to delete the disallowance
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