Interest cannot be disallowed if huge interest free funds were available without any interest

CA Sandeep Kanoi

AO while making this addition has observed as under:-

“5. Addition on account of interest not charged on Advances:

On perusal of Balance sheet of the assessee, during the course of assessment proceeding, it is seen that the assesses has stated Rs.92,24, 794/- as other advances, out of which he has shown interest received from 2 partiesn (1) Gaurav Industries and (2) Amtex Dye Chem Industries to the extent of Rs. 11,16_,069/- and Rs.5,46,874/- respectively. The assessee is showing interest income of Rs.6, 71,530/- as interest received from the above two parties. Rs. l,36,745/- from Gaurav Industries and Rs.5,34,785/-from -Amtex Dye Chem Industries. The assessee has claimed the Credit of TDS and offered Corresponding interest amount from the said 2 parties. Since the said amounts were included in the total advances of Rs. 92_,24,794/- but the assessee at his convenient showing interest on loans and advances. Since the TDS credit is avail the interest income is offered. The assesses has not offered interest income from the following parties to whom an aggregate amount of Rs. 77,76,005/- is offered during the F. Y.2007-08.

Thus the assessee has not following consistency and uniformity in offering interest income. During the course of hearing a show cause notice was issued on 1 9/1 1/2010 and the assessee was asked to furnish his objections for which the assessee has simply stated that they are interest free loans but not furnished any details or supporting. Since the assesses is a manufacturing concern and paying interest towards secured and unsecured loans and in the light of assessee ‘s submission it is observed that interest is not charged from the parties or persons through mutual convenience and accommodation. In view of the above discussion, interest @12% is charged on Loans and advances Rs.77,86,005/-amonnting to Rs. 9,34_,320/- is added to the total income of the assessee.”

 Ld. CIT(A) has deleted this addition by observing as under:-

“6.3 I have carefully considered rival submissions. I have also perused evidences furnished by the appellant and the case laws relied upon by the ld.A.R. It is seen that interest expenses of Rs. 9,34,320/- was disallowed u/s.36(1)(iii) of I.T. Act. As per the provisions of section 36(1)(iii)_, to claim interest expenses, following conditions should be fulfilled.

(i) The Assessee must have borrowed money

(ii) The interest should have been payable

(iii) Borrowing should be made for the purpose of business.

In my considered view, appellant has fulfilled all the above conditions and accordingly it is entitled to claim deduction u/s. 36(1)(iii) of I. T.Act against interest payment. Perusal of the assessment order reveals that the A. O. has not challenged basic enabling conditions as laid down u/s.36(1)(iii) for the allowance of interest. Since the enabling conditions for allowance of interest u/s.36(1)(iii) are fulfilled, accordingly in my considered view disallowance of interest is unwarranted.”

After hearing both the parties and perusing the record, we find the assessee was having interest free funds of Rs. 5.88 crores in the form of partners’ capital as on 31-03-2008 and assessee has given interest free funds loans and advances of Rs. 77.86 lacs to sister concern and other connected persons during the year under appeal. It is clear that interest free advances were at below the interest free funds available with the assessee. In these facts ratio of Hon’ble jurisdictional High Court’s decision in the case of Commissioner of Income-tax vs. Raghuvir Synthetics Ltd [2013] 217 Taxman 178 (Guj) is squarely applicable wherein it was held that where huge funds were available without any interest liability with assessee and there was no evidence to hold that borrowed money was utilized for purpose of advance to sister concerns, no disallowance of interest was warranted. In this view of the matter, we feel no need to interfere with the order passed by Ld. CIT(A) and the same is hereby upheld.