No Addition of Interest u/s 36(1)(iii) on Interest-Free Loan / Advance to Sister Concern out of Interest-Free Funds: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench has held that no addition of interest under section 36(1)(iii) on interest-free loan/ advance to sister concern out of interest-free funds.

The appellant, Sidiqbhai Usmanbhai is an individual and proprietor of M/s. S.K. Steel is engaged in the business of trading scrap. The Assessing Officer during the scrutiny assessment noticed that the appellant had given loans and advances to M/s. S.S. Enterprise and no interest is being charged by the appellant. Hence the AO by applying a 12% rate of interest, a sum of Rs. 2,60,154 made as an addition to total income under section 36(1)(iii) of the Act.

Aggrieved against the addition the appellant approached the first appellate authority, which after calling for a remand report from the Assessing Officer and upholds the addition. The aggrieved appellant filed an appeal before the ITAT.

The counsel for the appellant submitted that lower authorities has misplaced the Supreme Court judgment in the case of S.A. Builders wherein the issue was about the application of “borrowed fund” in making an advance to the sister concern. The facts in the appellant’s case are that the appellant had an “interest-free fund” and there is no question of application of “borrowed fund” to the sister concern.

The Tribunal observed that interest-free funds were used by the assessee for granting interest-free advances and it is not the case that “borrowed funds” were given as interest-free loans to the sister concern.

By relying on the decision of the Supreme court in the case of Reliance Industries the Coram of Mr. Waseem Ahmed, Accountant Member, and Mr. T.R. Senthil Kumar, Judicial Member has held that “we hold that the addition of Rs. 2,60,154/- made u/s. 36(1)(iii) r.w.s. 40A(2)(b) by the lower authorities are hereby deleted and the grounds of appeal raised by the assessee are hereby allowed”.

Mr. Samir Bhuptani and Mr. V.K. Singh appeared on behalf of the appellant and respondent.

To Read the full text of the Order CLICK HERE

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