The Income Tax Appellate Tribunal (ITAT) Mumbai Bench held that no addition should be made on loan advanced to directors and sister concern of the company from interest free Fund.
The assessee Parinee Housing Private Limited e has advanced interest free loans to the related parties and sister concern. During the assessment proceedings, the Assessing Officer made addition of interest on the loans advanced to the directors and sister concern/related parties
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax Appeals (CIT(A)), who deleted the addition made by the AO. Thus, the revenue filed the appeal before the tribunal.
During the hearing, Sudha Ramchandran, the ounsel for revenue submitted that assessee did not produce any evidence to show that the loans advanced to the directors and the sister concern are on account of business exigency. Further contended that the loans advanced by assessee to the Directors in violation of section 185 of the Companies Act, 2013.
Rajan Vora, the counsel for the assessee argued that once the assessee has been able to show that interest free funds are sufficient to cover interest free advances, no addition on account of notional interest can be made by the AO. Hence, it was also reflected in the Balance Sheet of the assessee company.
After reviewing the facts and submissions, the two-member bench of the tribunal comprising OM Prakash Kant (Accountant Member) and Vikas Awasthy (Judicial Member) after examining the Balance Sheet of assessee company observed that assessee has sufficient interest free funds for advancing loans to related parties.
Thus, the bench concluded that once the assessee has substantiated availability of sufficient interest free funds, there is no valid reason to make addition of notional interest on advances to related parties
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