STAR LOGISTICS PVT LTD.,CHENNAI vs. ITO CORPORATE WARD 6(4), CHENNAI

The only issue in this appeal of assessee is as regards to the order of CIT(A) in confirming the action of AO disallowing interest claimed u/s.36(1)iii) of the Act, for giving interest free funds to sister concerns.

Brief facts are that the assessee has obtained loan for an amount of Rs.7,59,33,550/- which comprised interest free loan and loan from Cholamandalam Investment and Finance for which no interest expenses was claimed during the year. The assessee has also obtained loan from bank amounting to Rs.1,65,37,554/- and incurred interest expenditure to the tune of Rs.38,11,423/-. This expenditure was claimed as business expenditure u/s.36(1)(iii) of the Act. The AO noted that the assessee has obtained loan from bank and given interest free loans to the tune of Rs.8,20,26,814/-. The AO also noted that interest free loans were available with the assessee at Rs.7,59,33,556/-. According to AO, interest bearing funds of Rs.60,93,264/- were diverted by the assessee for non- business purposes or given as interest free loans to various parties. Therefore, the AO recomputed the allowable interest out of the total interest expenses claimed at Rs.38,11,423/- and thereby made disallowance of Rs.14,04,336/-. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of the AO. Aggrieved, assessee came in appeal before the Tribunal.

We have heard rival contentions and gone through facts and circumstances of the case. The ld.counsel for the assessee made alternative argument that the assessee has paid interest on vehicle loan of Rs.30.17 lakhs out of the total expenditure claimed at Rs.38,11,423/-. For the interest bearing funds diverted towards interest free loans advanced to sister concerns amounting to Rs.60,93,264/-, the assessee explained that the assessee has cash accruals in the shape of depreciation of Rs.2,15,64,569/- and cash equivalent at the end of the year is at Rs.11,99,585/-. According to him, this is sufficient to meet the interest free loans advanced to sister concerns and these are not out of interest bearing loan funds on which expenditure is being claimed. When these facts were confronted to ld.Senior DR, he could not controvert the factual situation. We noted that the assessee is able to explain that interest free loans advanced to sister concerns are not diverted out of interest bearing loans rather accrual of interest free funds, which is enough to meet out the same. Hence, we are of the view that this disallowance deserves to be deleted. We delete the disallowance and direct the AO accordingly.

In the result, the appeal filed by the assessee is allowed.