The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has upheld the deletion of addition towards disallowance of interest on borrowed capital under Section 36(1)(iii) of Income Tax Act, 1961 out of commercial expediency.
This disallowance stem from the observation of AO that the assessee, Agni Estates & Foundations Pvt. Ltd advanced interest free funds to its group concerns to the extent of Rs.1101.06 Lacs as against the fact that it had borrowings and debited interest expenditure. The loans so advanced were not connected to assessee’s business and the business expediency of the same could not be established by the assessee. Accordingly, AO computed proportionate disallowance under Section 36(1)(iii) of the Income Tax Act.
The assessee submitted that the advances were out of commercial expediency and relied on the case High Court of Madras in CIT Vs. M. Ethurajan and also on the decision of Apex Court in the case of S.A. Builders Ltd. Considering these judicial decisions, CIT(A) deleted interest disallowance for both the years against which the revenue was in further appeal before us.
R. Vijayaraghavan, appeared on behalf of the assessee and D. Hema Bhupal appeared on behalf of the revenue.
R. Vijayaraghavan, on behalf of the assessee submitted no such disallowance could have been made by revenue as per ratio laid down by Supreme Court in the case of CIT Vs. Reliance Industries Ltd. He further submitted that in such a case, unless nexus of borrowed funds vis-à-vis advances made by the assessee was established by AO, a presumption would arise in assessee’s favour that the advances were made out of interest-free funds available with the assessee.
The two-member Bench of V. Durga Rao, (Judicial Member) and Manoj Kumar Aggarwal, (Accountant Member) observed that the interest-free funds available with the assessee in the shape of share capital and reserves & surplus far exceeds the short-term loans and advances adduced by the assessee. The assessee uses mixed funds. In such a case, a presumption would arise in assessee’s favour that the advances were made out of interest-free funds available with the assessee and the onus would be on AO to justify the impugned disallowance. The Bench dismissed the appeal filed by the revenue.
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