The Income Tax Appellate Tribunal (ITAT) Delhi Bench while deleting disallowance of interest held that investment made by the assessee company from its own interest free funds.
The assessee Living Media India ltd.is engaged in the business of Subscription, Publishing and trading of books, magazines and diaries, sale of advertisement space in magazines, trading of audio Cassettes, CDs and Art objects etc.
After the filing of revised return, the assessee case was selected for scrutiny. Accordingly the AO noticed that the assessee has investments in equity shares, income from which does not form part of total income to the extent of 1,39,00,73,250/.
Subsequently, the AO had also made a disallowance of Rs. 78,20,000/- Under Section 37(1) of the Income Tax Act, 1961 observing that during the year under consideration the assessee company has incurred interest expenses @ 3.4% on the funds borrowed whereas the loans and advances to related parties are interest free. Thus, the AO observed that the assessee had diverted interest bearing funds to not interest bearing activities.
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeal) {CIT(A)}, who dismissed the appeal of assessee. Thus, the assessee filed a second appeal before the tribunal.
During the proceedings Madhur Aggarwal, the counsel for the assessee submitted that when there are funds available, both interest free or loan taken, then a presumption would arise that investments would be out of interest free funds generated or available with the company provided said funds are sufficient to meet investments.
Garima Sharma, Departmental representatives supported the decision of lower authorities and contented that assessee was unable to cite business exigencies requiring the landing of such huge amounts without interest.
It was observed by the tribunal that assessee had sufficient surplus funds and had raised capital during the year by issuance of shares. Thus, merely because the assessee had also raised loans or paid interest against loans that does not justify the disallowance.
The tribunal after reviewing the facts and submissions of the both parties the single member bench of G. S. Pannu,( president ) and Anubhav Sharma (Judicial Member) relied upon the decision of the Supreme Court of India in South Indian Bank Ltd. vs. Commercial Income Tax held that if interest free own funds are available with the assessee or exceeds investment, investment would be presumed to be made out of assessee’s own fund.
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