TRANSASIA FINE PAPERS PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-7(1)(1), BANGALORE

The assessee has filed this appeal challenging the order dated 12.3.2021 passed by Ld. CIT(A), National Faceless Appeal Centre, Delhi and it relates to the assessment year 2017-18. The assessee is aggrieved by the decision of Ld. CIT(A) in confirming the addition of Rs.15,23,866/- relating to charging of interest on the ‘interest free loan’ given to related parties.

The assessee is engaged in the business of manufacture of specialized paper and other related products. During the course of assessment proceedings, the A.O. noticed that the assessee has Transasia Fine Papers Pvt. Ltd., Bangalore advanced a sum of Rs.1.61 crores to related parties and it did not charge any interest on it. The A.O. also noticed that the assessee has availed interest bearing loans from bank and is paying interest @ 9% p.a. Accordingly, the A.O. computed interest on the above said advance of Rs.1.61 crores @ 9% which worked out to Rs.15,23,866/-. The A.O. added the same to the income returned by the assessee. The Ld. CIT(A) confirmed the addition and hence the assessee has filed this appeal.

The Ld. A.R. submitted that the assessee had availed term loan from bank, which was used for specific purposes and hence, it cannot be diverted. Inviting our attention to details of long term borrowings, which is given in Note 5 of the financial statement placed at page 47 of the paper book, the Ld. A.R. submitted that the assessee has also availed interest free loans from related parties to the tune of Rs.11.10 crores. Hence the assessee was having sufficient interest free funds and the same has been used for giving interest free advance of Rs.1.61 crores to the related parties. Since the assessee is having sufficient interest free funds, the Ld. A.R. submitted that the tax authorities are not justified in making addition of notional interest.

The Ld. D.R, on the contrary, submitted that the assessee has not proved that interest free loan received by it only was diverted for giving interest free advances.

We heard the parties and perused the record. A perusal of Note 5 relating to long term borrowings would show that the assessee availed term loan of Rs.4.97 crores and loans and advances from related parties to the tune of Rs.11.10 crores. Admittedly, the term

If the assessee is having sufficient interest free advance to the tune of Rs.11.10 crores, which is much higher than the interest free advance given, then it is not justifiable to impute notional interest on the interest free loans given to related parties. Our view gets support from the decision rendered by Hon’ble Bombay High Court in the case of Reliance Utilities Ltd (313 ITR 340)(Bom).

However, we notice that the A.O. has not verified the availability of interest free funds of the assessee to the tune of Rs.11.10 crores and also claim of the assessee that it has not paid any interest on the above said amount is also required to be examined. Accordingly, we are of the view that this issue requires fresh examination at the end of the A.O. If the A.O. finds that the interest free funds available with the assessee is more than the amount of interest free advances given to the related parties, then there is no requirement of making any disallowance out of interest expenditure. Accordingly, we restore this issue to the file of the A.O. to examine the above said factual aspects and take decision in the light of discussions made (supra). Accordingly, the order passed by Ld. CIT(A) on this issue is set aside.

In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.