Moonrock Hospitality (P) Ltd. Vs ACIT (ITAT Delhi)
The assessee appealed against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2016-17, challenging the confirmation of disallowance under Section 36(1)(iii) of the Income Tax Act, 1961. The dispute related to the proportionate interest disallowed on the ground that the assessee had advanced interest-free funds to its wholly owned subsidiary. The assessee contended that the funds had been extended to the subsidiary to pursue its business activities in furtherance of commercial expediency.
The assessee, a company having investments in wholly owned subsidiaries, had borrowed funds from various companies and advanced an interest-free loan of ₹2,49,50,000 to its subsidiary, M/s Vinu Promoters Pvt. Ltd. The Assessing Officer observed that the advance had been made out of interest-bearing funds and called upon the assessee to explain why interest expenditure should not be disallowed under Section 36(1)(iii). Although the assessee submitted that the advance was for business purposes, the Assessing Officer held that there was diversion of interest-bearing funds towards a non-interest-bearing advance to a related concern. Applying an interest rate of 9%, the Assessing Officer computed proportionate interest and ultimately made a disallowance of ₹10,88,438 under Section 36(1)(iii). The CIT(A) upheld the disallowance.
