Case Law Details
Living Media India ltd Vs ACIT (ITAT Delhi)
ITAT Delhi held that disallowance u/s 37(1) of the Income Tax Act towards investment made out of interest free own funds available with the assessee is unjustifiable and hence deleted.
Facts- The issue involved here is that AO has made a disallowance of Rs. 78,20,000/- u/s. 37(1) of the Act observing that during the year under consideration the assessee company has incurred interest expenses @ 3.4% on the funds borrowed whereas the loans and advances to related parties are interest free. It concluded the proportionate finance cost attributable to the interest free advance given by the assessee company to its related concern comes to Rs. 78,20,000/- being 3.4% of Rs. 23 crores. AO had observed that assessee had diverted interest bearing funds to not interest bearing activities.
Ld. First Appellate Authority sustained the disallowance. Being aggrieved, the present appeal is filed.
Conclusion- Held that the assessee had sufficient surplus funds and had raised capital during the year by issuance of shares. Thus, merely because the assessee had also raised loans or paid interest against loans that does not justify the disallowance. The investment in subsidiary and related entities has to be made for commercial purpose to earn future profits. It is not the case of revenue that investment were made in any entity not having any nexus with the principal object of assessee company. Hon’ble Supreme Court of India in South Indian Bank Ltd. vs. Commercial of Income Tax has held that if interest free own funds are available with the assessee or exceeds investment, investment would be presumed to be made out of assessee’s own fund. Thus, the Bench is convinced that the disallowance was not justified the same deserves to be deleted.
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