Siwana Agri Marketing Ltd. Vs ACIT (ITAT Ahmedabad)
ITAT Ahmedabad held that amount written-off towards non-recoverable advances given to employees which are incidental to business operations qualifies as deductible business expenses under section 37 of the Income Tax Act.
Facts- The case of the assessee was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) and the AO completed the assessment u/s. 143(3) of the Act on 27-11-2019, determining total income at Rs.97,85,762/-. AO disallowed Rs.65,86,200/- u/s. 36(1)(iii) of the Act, observing that the assessee had advanced interest-free loans amounting to Rs.5.48 crores while incurring significant interest expenses on unsecured borrowings. AO held that the assessee failed to establish a nexus of these advances with interest-free funds and did not demonstrate any business purpose. AO also disallowed Rs.8,002/-, citing non-compliance with Section 36(2) of the Act, as the amount written off was not recognized as income in earlier years.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- Held that where sufficient interest-free funds are available, the presumption arises that such advances are made from those funds. Following the principle established in CIT v. Reliance Industries Ltd., it is presumed that such advances are made from interest-free funds. The Revenue has failed to establish a direct nexus between borrowed funds and these advances. Therefore, the disallowance of interest expenses under Section 36(1)(iii) of the Act cannot be sustained.
