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Facts
The Assessing Officer disallowed a portion of interest expenditure under Section 36(1)(iii) of the Income Tax Act, disallowing proportionate interest on interest-free advances made by the assessee to its sister concerns. The CIT(A) allowed the assessee's appeal, holding that the advances were made from interest-free funds and were for business purposes, citing the S.A. Builders case.
Held
The Tribunal restored the matter to the CIT(A) to obtain a 'funds flow statement' from the assessee to verify if adequate interest-free funds were available at the time of granting advances to sister concerns. The Tribunal noted that the CIT(A) had granted relief without such verification.
Key Issues
Whether the CIT(A) erred in allowing the appeal without verifying the source of funds for interest-free advances to sister concerns and whether adequate interest-free funds were available.
Sections Cited
36(1)(iii), 147, 148, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & SHRI SIDDHARTHA NAUTIYAL
(Assessment Year: 2016-17) Deputy Commissioner of Vs. Oswal Extrusion Ltd., Income Tax, HB Jirawla House HB, Jirawla Central Circle-1(2), House 13, Navbharat Society, Ahmedabad Opp. Panchshil Bus Stop, Ushmanpura-380013 [PAN No.AAACO7290H] (Appellant) .. (Respondent) Appellant by : Shri B.P. Srivastava, Sr. D.R. Respondent by: Ms. Astha Maniar, A.R. 26.11.2024 Date of Hearing Date of Pronouncement 22.01.2025 O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Department against the order passed by the Ld. Commissioner of Income Tax (Appeals)-11, (in short “Ld. CIT(A)”), Ahmedabad vide order dated 12.01.2024 passed for A.Y. 2016-17.
The Revenue has taken the following grounds of appeal:-
1. Ground whether, in the facts and on the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the addition made on account of disallowance u/s 36(1)(iii) of the Act of Rs. 3,66,00,000/-?
3. The brief facts of the case are that during the course of assessment, the Assessing Officer observed that the assessee company had given interest free advances to HCP Enterprise Ltd. for a sum of Rs. 30 crores DCIT vs. Oswal Extrusion Ltd. Asst.Year –2016-17 - 2– and Rs. 50 lakhs to Prasthan Infrastructure Ltd. and accordingly, debited interest expenditure of Rs. 933.52 lakhs in the Profit & Loss Account. The Assessing Officer held that as per Section 36(1)(iii) of the Act, deduction for interest paid in respect of capital borrowed is allowable only if borrowed fund has been utilized for the purpose of business or profession. However, in the instant case, the assessee had given interest free advances to HCP Enterprise Ltd. and Prasthan Infrastructure Ltd. for no business purposes. Further, the asessee company failed to establish the nexus, that interest free funds have been utilized for the purpose of giving advances to HCP Enterprise Ltd. and Prasthan Infrastructure Ltd. Therefore, the Assessing Officer made disallowance of proportionate interest @ 12% of interest free advances of Rs. 30,50,00,000/- under Section 36(1)(iii) of the Act, amounting to Rs. 33,66,00,000/- on account of interest bearing funds being utilized for non-business purposes.
4. In appeal, Ld. CIT(A) allowed the appeal of the assessee with the following observations:
6.2 On perusal of the details available, one fact is clear that the appellant has interest free fund in the form of share capital and Reserve & Surplus amounting to Rs.59,59,71,000/- in A.Y2015-16 & Rs.64,67,15,000/- in A.Y.2016-17. It is also observed that the appellant has claimed that the said entity M/s. HCP Enterprise Ltd. is a sister concern of the appellant. Since both entities are clearly associated ones and the amounts advanced to the associated company had invariably been used for the business/commercial exigencies, no disallowances of interest is warranted as the issue is directly covered by the ratio of the decision of the Hon'ble Supreme Court in case of S.A. Builders Vs. CIT (SC) (2007) 2BB ITR 1. It is further found that the appellant proposed to carry out its business activities on these two premises and entered into an MOU with the said party on 09.09.2014 and as per the terms of the said MOU as well as looking to the market value of the said properties i.e. Plot No. 7.8 (Part) and 10 (Part). Block No. 828 valued at Rs.19.?3 Crores (as on 02.01.2015) & Survey No. 44, Village Varsana Gandhidham valued at 20.33 Crores in March 2014, the appellant had given interest free security deposits towards utilization of the premises as DCIT vs. Oswal Extrusion Ltd. Asst.Year –2016-17 - 3– mentioned in the said MOU out of the non-interest bearing funds as mentioned in the above table. The appellant has also given a chart related to explain the source of the interest free funds advanced to its sister concern,
5. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A).
6. Before us, the Ld. D.R. submitted during the course of appellate proceedings that the reserves and surplus of the assessee were already deployed towards fixed assets by the assessee. Further, while allowing the appeal of the assessee the Ld. CIT(A) did not call for any funds flow statement to verify whether at the time of advancing funds to the assessee, the assessee had sufficient interest free funds available so as to give interest free advances to the sister concerns, as stated. In response, the Counsel for the assessee primarily relied upon the observations made by Ld. CIT(A) and reiterated the submissions which were made before Ld. CIT(A), which are to the effect that the advances were made to sister concerns for business purposes in terms of MOU dated 09.09.2014, in which the assessee had given interest free security deposited towards utilization of the premises of it’s sister concerns in terms of the said MOU. Further, the Counsel for the assessee submitted that during the impugned year under consideration, the assessee was having substantial interest free funds to the tune of Rs. 64.67 crores and therefore, no interest bearing funds were utilized for the purpose of advancing money to the sister concern. Further, the Counsel for the assessee submitted that since both the entities to whom advances had been given by the assessee were sister concern of the assessee, invariably such advances had been used for
We have heard the rival contentions and perused the material on record.
On going through the contents of the order passed by Ld. CIT(A), relief has been granted to the assessee firstly for the reason that the assessee was having substantial interest free funds available with the assessee. Secondly, since both the concerns to whom interest free funds had been granted were sister concerns, the advances were invariably use for business / commercial exigencies and no disallowance of interest was warranted. Further, in terms of the MOU, the interest free security deposit was given to the sister concern for the use of their premises and therefore, no disallowance of interest was called for. On going through the contents of the order passed by Ld. CIT(A), we observe that Ld. CIT(A) has primarily relied on the written submissions filed by the assessee and afforded relief to the assessee, without verifying whether at the time of grant of funds to the sister concerns, adequate interest free funds were available with the assessee and that the reserves and surplus had not been deployed towards acquisition of fixed asset. In our considered view, before granting relief to the assessee, the Ld. CIT(A) should have called for a “funds flow statement” from the assessee to ascertain whether at the time of grant of funds, the asessee was in possession of adequate interest free funds. However, Ld. CIT(A) did not carry out the above exercise, while granting relief to the assessee. Accordingly, in the interest of justice, the matter is restored to the file of Ld. CIT(A) to call for the “funds flow statement”, to ascertain that at the time of gain of interest free funds to it’s sister concern, the assessee was having adequate interest free funds, from which such advances had been given.
In the result, the appeal of the Department is allowed for statistical purposes. This Order is pronounced in the Open Court on 22/01/2025
Sd/- Sd/- (DR. BRR KUMAR) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 22/01/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��थ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,