The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the disallowance of Rs. 26.25 Lakh under Section 36(1)(iii) of Income Tax Act, 1961. This decision was made based on the assessee’s records submission of sufficient interest-free funds and commercial expediency.
Oriental Enterprise Pvt. Ltd., (assessee) gave a loan of Rs.1.75 crore to its subsidiary, Oriental Nicco Projects Pvt. Ltd., at an interest rate of 15% but the assessee did not show interest income in the financial statements for the assessment year 2016-17. The assessing officer scrutinized the loan given to its subsidiary during the assessment proceedings. The AO questioned the interest-free nature of the loan when the assessee-company itself had interest expense during the same period.
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Consequently, the AO disallowed a proportionate amount of ₹26.25 lakh under Section 36(1)(iii) of the Income Tax Act, reasoning that the borrowed funds were not used exclusively for business purposes. The aggrieved assessee appealed before the Commissioner of Income Tax (Appeals) against the AO order where the assessee claimed that it had sufficient interest-free funds, amounting to ₹17.89 crore, and therefore, no disallowance of interest expenditure was warranted.
The assessee also argued that the loan to the subsidiary was for business purposes (commercial expediency), supporting the operations of the subsidiary, which was integral to its business strategy. However, the CIT(A) upheld the AO’s disallowance reasoning that the assessee did not maintain separate accounts for interest-free and interest-bearing funds and lack of conclusive evidence.
Aggrieved by the CIT(A) decision, the assessee appealed before the Ahmedabad Bench of ITAT. The AR argued that the assessee’s actions were supported by several court decisions, including those of the Supreme Court and the Gujarat High Court, emphasizing the commercial expediency of the transactions. On the contrary, the revenue counsel supported the lower authorities’ orders.
The two-member bench comprising Suchitra Kamble (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed the submission of the assessee’s audited financial statements which showed interest-free funds far exceeding the loan amount, and judicial precedents that emphasized that loans provided for commercial expediency do not warrant disallowance of interest.
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The tribunal noted that the CIT(A) rejected the assessee’s claims relying on the Rajasthan High Court Ruling in Indian Savings Products Ltd, where the facts differed from the present case. The tribunal explained that the concept of fungibility of funds is essential in tax assessments, especially for disallowing interest under Income Tax Section 36(1)(iii). It means that once deposited into a common pool, money from different sources becomes interchangeable and indistinguishable.
The tribunal observed that the assessee successfully demonstrated that sufficient interest-free funds were available and the loan was advanced for commercial expediency. Therefore, the tribunal overturned the CIT(A)’s decision and directed the deletion of the disallowance of ₹26.25 lakh under Section 36(1)(iii).
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