No disallowance of interest, if interest-free unsecured loans are sufficient to meet interest-free advances – Guj HC


CIT v KAJAL EXPORTS [Tax Appeal No. 756 of 2013 dated 23.01.2014] (Gujarat High Court)

Background:

Assessee is engaged in business of export activities. During the course of assessment proceedings, the AO observed that the assessee had made borrowings throughout the year under the banner of business necessity and on review of the purchases and the sales patterns of the assessee, held that the funds borrowed were utilised for purposes other than business. The AO further noted that the assessee had advanced money to close relatives/ sister concerns without charging the interest. Accordingly, the AO disallowed the interest expenditure.

CIT(Appeals) concluded that the borrowed funds were not used for the business purposes in the AY 2003-04 and the AO was justified in disallowing the expenditure on such borrowed funds to the extent it is claimed in the P&L account. The Tribunal deleted the entire amount except Rs.21,900/-, i.e. 15% of Rs.1.46 lakhs. 

HELD:

  • The issue could be bifurcated this wise: (i) non use of borrowed funds for business (ii) interest free advances given to the partners.
  • On the first aspect, the Tribunal noted that there was no fresh borrowing in the year under consideration and already borrowed funds had reduced from Rs1953 lakhs to Rs.1239 lakhs. This substantial reduction led the tribunal to note that it would not be possible to hold that the borrowed funds were not used for business purpose merely because the investment, loans and advances given to the partners and the debit balance of the partner’s capital account had gone up.
  • With respect to the interest free advances made available to the partners, tribunal has rightly held that Rs.97.26 lakhs interest free advance were made whereas the assessee had interest free borrowings to the tune of Rs.95.80 lakhs available with it and therefore, only for the remaining sum of Rs.1.46 lakhs, it had confirmed the disallowance of the interest.
  • Based on the materials available when the tribunal has appropriately held in favour of the assessee, noting the availability of interest free funds, as also with regard to utilisation of funds available with the assessee, for the business purpose, we do no see any reason to interfere in the reasonings in absence of any perversity. 

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