DCIT Vs Agni Estates & Foundations Pvt. Ltd (ITAT Chennai)
The recent decision by the Income Tax Appellate Tribunal (ITAT) in the case of DCIT vs. Agni Estates & Foundations Pvt. Ltd sheds light on the contentious issues of interest disallowance under section 36(1)(iii) and the disallowance of business expenses under section 37(1) of the Income Tax Act. The appeals, arising from a common order of the Commissioner of Income Tax (Appeals) for the assessment years 2013-14 and 2014-15, presented two primary issues for consideration.
Interest Disallowance under Section 36(1)(iii)
The Assessing Officer (AO) had disallowed interest on borrowed capital amounting to Rs. 2,04,45,076, contending that the funds were advanced to sister concerns without demonstrating commercial expediency. The AO argued that the interest on the amount lent to sister concerns from interest-bearing funds is allowable only if it serves a commercial purpose. The Commissioner of Income Tax (Appeals) (CIT(A)) relied on the Supreme Court decision in the case of S.A. Builders Ltd vs. CIT (288 ITR 1) and held that interest on funds lent to sister concerns is allowable if it is done for commercial expediency.
The ITAT concurred with the CIT(A) and noted that the funds were advanced out of commercial expediency. The tribunal emphasized that the taxpayer’s own funds exceeded the advances, and the AO failed to establish a nexus between borrowed funds and advances. Citing the decision in CIT vs. Reliance Industries Ltd. (102 Taxmann.com 52), the ITAT stated that in the absence of such nexus, a presumption arises in favor of the assessee that advances were made from interest-free funds. Therefore, the grounds raised by the revenue were dismissed.
