ITAT Bangalore: No Disallowance U/s 36(1)(iii) When Interest-Free Funds Exceed Advances-Revenue Appeals Dismissed

ACIT Vs Brigade Enterprises Limited (ITAT Bangalore)

ITAT Bangalore: No Disallowance U/s 36(1)(iii) When Interest-Free Funds Exceed Advances-Revenue Appeals Dismissed

In the case of Brigade Enterp rises Ltd., the Bangalore ITAT upheld deletion of interest disallowances u/s 36(1)(iii) made by the AO on account of interest-free advances to sister concerns.

The Tribunal noted (as evident from balance sheet figures on record) that:

• The assessee had substantial interest-free funds (share capital + reserves) far exceeding the advances given,
• Therefore, a presumption arises that such advances are made out of interest-free funds, unless contrary evidence is shown—which the Revenue failed to establish.

The ITAT relied on:

• Karnataka High Court ruling in assessee’s own case, and
• Supreme Court decisions including Reliance Industries Ltd. and SA Builders, affirming that no disallowance is warranted when sufficient own funds exist.

Accordingly:

• Disallowances of ₹5.32 crore (AY 2013-14) and ₹2.32 crore (AY 2011-12) were rightly deleted by CIT(A),
• Revenue’s contention of “mixed funds” was rejected due to lack of evidence.

Both appeals of the Revenue were dismissed, reinforcing the settled principle that availability of sufficient interest-free funds protects advances from disallowance u/s 36(1)(iii)

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. These two appeals have been filed by the revenue challenging the orders of the first appellate authority on a similar issue, which was decided in favour of the assessee based on the Honourable High Court’s decision in the assessee’s own case for previous assessment years. Accordingly, both appeals are disposed of by this common order.

2. ITA No. 2486/Bang/2025 is filed by the Assistant Commissioner of Income Tax, Central Circle – 2(3), Bengaluru (the Ld. Assessing Officer) in case of M/s. Brigade Enterprises Limited (the Assessee) for Assessment Year 2013-14 against the Appellate Order passed by the Commissioner of Income Tax (Appeals) – 15, Bengaluru (the Ld. CIT(A)) dated 21.08.2025 wherein the Appeal filed by the Assessee against the Assessment Order passed by the Ld. Assessing Officer u/s. 143(3) r.w.s. 153A r.w.s. 254 of the Income Tax Act, 1961 dated 31.03.2023 was allowed. The Ld. Assessing Officer is aggrieved and is in Appeal before us raising solitary ground of Appeal that the Ld. CIT(A) has decided the issue solely based on the balance sheet of the Assessee disregarding other examination directed by the ITAT in the order u/s. 254 dated 11.10.2021.

3. The briefly stated facts of the case shows that the Assessee is engaged in the business of developing and constructing residential and commercial complexes, filed its return of income on 29.11.2023 at a total income of Rs. 1,45,82,610/-. The Assessment u/s. 143(3) of the Act was passed on 30.03.2016 at a total income of Rs. 17,28,83,640/-. The Assessee preferred an Appeal before the Ld. CIT(A) which was dismissed on 30.08.2019 which was challenged before the ITAT. Meanwhile, on 02.11.2017, search u/s. 132 of the Act was carried out and proceedings u/s. 153A were initiated. The Assessment Order u/s. 143(3) r.w.s. 153A was passed on 31.12.2019. One of the disallowanceswas Rs. 2,53,98,467/-u/s. 36(1)(iii) of the Act. The ITAT vide its order dated 11.10.2021 remanded the issue back to the file of the Ld. Assessing Officer to verify the cash flow statement to show that sufficient funds were available with the Assessee for advancing the same to its sister concerns and in such a case no disallowance to be made. The Ld. Assessing Officer submitted the financial statement of the Assessee, and it was shown that the Assessee has more interest free funds available in the form of reserves and surplus than the amount of loan given to sister concerns without charging interest. Thus, no disallowance could have been made u/s. 36(1)(iii) of the Act. The Ld. Assessing Officer noted that Assessee has advanced Rs. 3,05,66,25,039/- to the sister concerns and thereafter rejected the contentions of the Assessee that advances were on account of commercial expediency for the purpose of the business. The Ld. Assessing Officer noted that the loan given to related parties is out of mixed funds and accordingly there was a disallowance of Rs. 5,32,41,623/- was made because Assessee has claimed financial cost of Rs. 82.88 crores and indirect financial cost of loan given to sister concern without charging interest was Rs. 5,32,41,623/-.

4. The Ld. CIT(A) considered this issue as per ground no. 4 of the Appeal at paragraph no. 6.3. The Ld. CIT(A) noted the facts that Assessee has a share capital of Rs. 11,225 lakhs, reserves and surplus of Rs. 1,09,585 lakhs and interest free funds received from customers of Rs. 13,219 lakhs. The cash flow free operating activities were also shown to be for the year of Rs. 24,738 lakhs. It was stated that a sum of Rs. 30,567 lakhs are less than the interest free funds available with the Assessee and therefore there cannot be any disallowance. The Ld. CIT(A) in paragraph no. 6.3 has noted that claim of the Assessee is correct in view of the decision of the Hon’ble Supreme Court in CIT v/s. M/s. Core Healthcare Limited 298 ITR 194 and SA Builders Limited v/s. CIT 288 ITR 1. The Ld. CIT (A) in paragraph no. 6.4 stated that the Hon’ble Karnataka High Court in Assessee’s own case for the Assessment Year 2009-10 and 2010-11 held that no interest disallowance can be made in the hands of the Assessee in view of the available interest free funds share than interest free advances. Thus, he deleted the disallowance.

5. Ld. Representatives were heard.

6. We have carefully considered the rival contention and perused the orders of the Ld. Lower Authorities. In this casefrom the balance sheet, the Assessee has shown that interest free funds are available in the form of share capital and free reserve of Rs. 1208 crores whereas the loan advances given to the sister concern is merely Rs. 305 crores. Therefore,the presumption rises in favour of the Assessee that the amount of interest free advances given by the Assessee emanated from interest free funds available with the Assessee unless any contrary income is available. In this case, the Ld. Revenue Authorities could not give any contrary evidence. The issue is also covered in favor of the Assessee by the decision of the Hon’ble Karnataka High Court for Assessment Year 2009-10 and 2010-11 which is not in dispute. Further, the Ld. CIT(A) has correctly applied the decision of the Hon’ble Supreme Court, and this finding of fact could have been arrived only on verification of the balance sheet. The Ld. Assessing Officer in grounds of appeal has not stated that what else is required is to be verified by the Ld. CIT(A) in this case. In view of this, we do not find any merit in the Appeal of the Ld. Assessing Officer and dismiss ground no. 1 of the Appeal.

7. In the result, the ITA No. 2486/Bang/2025 filed by the Ld. Assessing Officer is dismissed.

8. ITA No. 2485/Bang/2025 is also filed by the Ld. Assessing Officer in case of the same Assessee for Assessment Year 2011-12 against the order of the Ld. CIT(A) dated 21.08.2025 for Assessment Year 2011-12 wherein the Appeal filed by the Assessee against the Assessment Order passed u/s. 143(3) r.w.s. 254 of the Income Tax Act, 1961 dated 30.08.2018 was allowed. The Ld. Assessing Officer is aggrieved by the fact that Ld. CIT(A) has deleted the disallowance of interest of Rs. 2,32,49,384/-.

9. The brief facts of the case show that in this case the Assessment u/s. 143(3) r.w.s. 254 of the Act was passed under identical circumstances wherein the Ld. Assessing Officer noted that Assessee has made an investment in another private limited company and consequent interest of Rs. 2,32,49,384 is disallowable u/s. 36(1)(iii) of the Act. The Ld. CIT(A) as per paragraph no. 4.3 has deleted the above disallowance following the decision of the Hon’ble Karnataka High Court in Assessee’s own case dated 22.10.2020 in ITA No. 373/2014 for Assessment Year 2009-10 holding that the Assessee has interest free surplus funds available.

10. Ld. Representatives were heard.

11. We have carefully considered the rival contention and find that the Assessee has share capital and free reserve of Rs. 1,12,502 lakhs whereas investment made by the Assessee in loans and advances is merely Rs. 42,487 lakhs which is far less than the interest free funds available with the Assessee.

12. The Ld. CIT(A) has extracted this evidence on verification of the balance sheet and further followed the decision of the Hon’ble Supreme Court also in CIT v/s. Reliance Industries Limited 102 taxmann.com 52 over and above the decision of the Hon’ble Karnataka High Court in Assessee’s own case. As the Ld. Departmental Representative could not dispute the above figures mentioned at paragraph no. 4.2 of the order of the Ld. CIT(A), of interest free funds available and the noninterest bearing advances given, we do not find any infirmity in the order of the Ld. CIT(A) in deleting the above addition.

13. Accordingly, the Appeal of the Ld. Assessing Officer is dismissed.

14. Both the Appeals filed by the Ld. Assessing Officer are dismissed.

Order pronounced in the open court on 20^th April, 2026.