DCIT Vs Oswal Extrusion Ltd (ITAT Ahmedabad)
Income Tax Appellate Tribunal (ITAT) Ahmedabad heard an appeal filed by the Income Tax Department against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] for the Assessment Year 2016-17, in the case of DCIT Vs Oswal Extrusion Ltd. The core issue was the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, related to interest-free advances made by Oswal Extrusion Ltd. to its sister concerns, HCP Enterprise Ltd. and Prasthan Infrastructure Ltd. The Assessing Officer (AO) had disallowed a portion of the interest expenditure, arguing that the borrowed funds were not used for business purposes.
The CIT(A) had allowed Oswal Extrusion Ltd.’s appeal, noting that the company had sufficient interest-free funds in the form of share capital and reserves & surplus. The CIT(A) also considered that the advances to sister concerns were for business/commercial exigencies, citing the Supreme Court’s decision in S.A. Builders Vs. CIT. Additionally, the CIT(A) accepted the company’s claim that the advances were interest-free security deposits as per a Memorandum of Understanding (MOU) for the utilization of premises.
The ITAT, however, found that the CIT(A) had primarily relied on the assessee’s submissions without adequately verifying the availability of sufficient interest-free funds at the time the advances were made, and whether the reserves and surplus were deployed towards fixed assets. To ensure a thorough examination, the ITAT restored the matter to the CIT(A). The ITAT directed the CIT(A) to call for a “funds flow statement” from Oswal Extrusion Ltd. to verify the availability of adequate interest-free funds when the advances were granted. The ITAT emphasized the need to ascertain that the advances to the sister concerns were indeed made from available interest-free funds. The ITAT allowed the department’s appeal for statistical purposes.
