Advances Presumed to Be Made from Available Interest-Free Funds When Sufficient Funds Exist: ITAT [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal(ITAT)  ruled that advances are presumed to be made from available interest-free funds when sufficient funds exist.

Siwana Agri Marketing Ltd,appellant-assessee, filed its income tax return for AY 2017-18, declaring ₹31.91 lakh as income. After scrutiny, the Assessing Officer(AO) completed the assessment, increasing the income to ₹97.85 lakh.

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The AO disallowed ₹65.86 lakh under Section 36(1)(iii), stating that interest-free loans of ₹5.48 crore were given despite significant interest expenses, without proof of business purpose. Another ₹8,002 was disallowed under Section 36(2) because the written-off amount was not earlier recognized as income.

The appellant argued that the loans were from interest-free funds and the write-offs were business-related. However, the Commissioner of Income Tax(Appeals)[CIT(A)] upheld the AO’s decision, citing a lack of evidence.

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The assessee, aggrieved by the CIT(A)'s decision, appealed to the tribunal, arguing that the disallowance of ₹65.86 lakh as interest expense under Section 36(1)(iii) was incorrect and requested its allowance in the total income calculation.

The Authorized Representative (AR) of the assessee explained that the company had enough funds to give the loan, showing financial statements with a total of ₹271.06 lakh in 2017 and ₹303.13 lakh in 2016. The loan given in the year was ₹15.75 lakh, and the rest were opening balances.

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The AR also pointed out that no disallowance was made in previous years, even with similar advances, and the company earned ₹1.10 crore in interest income. The AR argued that no disallowance was needed since the company had enough funds and referred to the Supreme Court’s Reliance Industries case for support.

The tribunal reviewed the submissions and findings of the AO and CIT(A). The CIT(A) had stated that the assessee failed to prove that interest-free funds were used for ₹5.48 crore advances and did not show any business purpose, relying on the Supreme Court’s ruling in S.A. Builders v. CIT. The CIT(A) also ignored that similar advances in previous years were not disallowed.

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The appellate tribunal found that the assessee had sufficient interest-free funds of ₹27.10 crore in 2017, which were enough to cover the advances. It disagreed with the CIT(A)'s reliance on the S.A. Builders case, citing the later ruling in CIT v. Reliance Industries Ltd., which assumed that advances were made from available interest-free funds. Since the Revenue failed to prove a link to borrowed funds, the disallowance of interest expenses was not justified.

In short,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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