Where interest-free advances are made out of owned funds, no disallowance of interest can be made – Mum ITAT


M/s GOLDEN TOBACCO LTD v Addln CIT ITA No.3198/Mum/2011; ITA No.5213/Mum/2010 dtd 26.06.2013 – Mum ITAT

Background: 

Assessee has given interest-free advances to various sister concerns or other concerns totalling to Rs.2,68,61,882. Assessee during the course of assessment proceedings these advances are for business expediency or given out of its own funds. 

The AO did not accept the explanation of the assessee and observed that no explanation has been given in respect of Luster Print Media Limited and Dalmia Fresenius Limited. The AO considered these interest free loans as given for the purpose other than business. In respect of other parties also the A.O. noticed that the assessee has not given satisfactory reply in respect of interest free advances / loans. Therefore, he disallowed at the rate of 20% on the interest-free loans.

Assessee’s contentions:

  • Monies given to subsidiary companies were given as share application money
  • The investment has been made out of profit of the company and no borrowed funds have been utilized for making this investment
  • The AO  failed to appreciate that additions made are not of borrowed funds as the advances were given in earlier year when the assessee has sufficient interest free funds.

HELD:

  • The addition made by the A.O. cannot be sustained both on facts and in law as the loans were given in the earlier years 
  • Assessee had sufficient general reserves of Rs.62.23 crore available for investment 
  • The A.O. did not make any efforts to show any nexus between borrowings and subsequent advancing the loan to the subsidiary company
  • The decision of the Apex Court in the case of S.A. Builders is fairly applicable on the facts of the present case. 

Other Issues:

Interests earned by the assessee from the banks were against bank guarantee or letter of credit. Therefore, these interests had been directly linked with the commercial activity of the assessee. When there is a commercial activity established, then of course, earning of interest or incurring of expenditure for earning the interest is to be treated as for business expediency. In the case of assessee there is a direct nexus between the borrowed funds and the margin money deposited by the assessee with the bank. Accordingly, issue is allowed in favour of assessee after verification of the facts that there is a direct nexus between the earning of interest and expenditure of interest

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