The Bangalore bench of Income Tax Appellate Tribunal (ITAT) has recently held that interest-free funds advanced to sister concern for purchase land are revenue in nature.
Assessee, RNS Infrastructure Limited filed a return of income on 22.9.2014 declaring total income at Rs.8,80,66,421. The case was selected for scrutiny. During the course of assessment proceedings, the AO noted that the assessee has given advances to its sister concern, M/s. Naveen Hotels Ltd. for the purchase of land and the average interest had been paid on the overdraft (OD)facility by the assessee.
AO observed that the advance paid to Naveen Hotels Ltd. was capital in nature, because the loan advanced to Naveen Hotels was for the purchase of land and it was not put to use during the impugned assessment year. On appeal, the CIT(A) upheld the order of the AO. Thereafter the assessee filed a second appeal before the tribunal.
Shreesh Kumar Hegde counsel for the assessee submitted that the assessee has made the payment to the sister concern out of the interest-free cash available with the assessee. The entire land advance for Naveen Hotels is made from the interest-free funds available with the Assessee. The advance is not a capital expenditure. P. Suresh Rao counsel for the revenue submitted that CIT(Appeals) has rightly confirmed the order of the AO after examining the details.
The assessee has given advances to its sister concern from the OD a/c /CC a/c / Current a/c which indicates that the assessee had no sufficient own funds for giving advances and there was no debit balance of loan accounts.
It was observed by the tribunal that the AO proportionately disallowed the interest by holding that the interest should be capitalized as per proviso to section 36(1)(iii) of the Income Tax Act, 1961 because the assets were not put to use during the impugned assessment year.
Moreover, on going through the ledger account of Naveen Hotels in the books of the assessee company, it was noticed that the interest-free funds have been given on various dates on a piece-meal basis and the amount has also been received back from the sister concern on different dates, but no interest has been charged on the advances.
The two-member bench of George George K., (Judicial Member) and Laxmi Prasad Sahu, (Accountant Member) allowed the appeal filed by the assessee.
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