Where sufficient own interest free funds were available, the presumption is that the said funds were used for making interest free advances calling for no disallowance of interest.

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Where sufficient own interest free funds were available, the presumption is that the said funds were used for making interest free advances calling for no disallowance of interest.

 

 

Allowability of deduction towards Interest on borrowings as Business expenditure is the most frequent issue during income tax proceeding.

 

In various cases, there is a disallowance of interest u/s. 36(1)(iii) which is done by A.O. on interest free loans and advances given by assessee noting that assessee had borrowed interest bearing funds.

 

Here was one case on the similar issue as under:

 

 

BAJAJ FOODS LTD. vs. INCOME TAX OFFICER

(2022) 64 CCH 0163 Ahd Trib.

 

AO observed that assessee had borrowed interest bearing funds by way of secured loans to extent of Rs. 217.23 lacs and paid interest thereon amounting to Rs. 25,97,905.

 

A.O. also noted that assessee had not established any business purpose for making advance and interest free funds he held were invested in assets of Assessee Company.

 

AO noted that it was borrowed funds which were used for making interest free advances and accordingly disallowed interest thereon @ 12% but was restricted to extent of interest payment made by assesse.

 

On Appeal before first appellate authority, the CIT(A) upheld disallowance.

 

 

On appeal before the second appellate authority, ITAT held as under:

 

In case of assessee in assessment year 2010-11 on finding that assessee’s pleadings, that it had sufficient own funds to cover advances for business purposes, was not adjudicated despite specific submissions made before lower authorities, restored issue back for adjudication afresh.

 

In impugned case, it is noted from order of CIT(A) that he has restored issue to A.O. for determining whether advances were for purpose of business of assessee, while rest of arguments of assessee were rejected.

 

AO had noted quantum of interest free funds available with assessee. This amount of Rs.3,09,93,719/- was sufficient for making interest free advances of Rs.1,98,55,747/-. and in view of settled proposition of law in case of CIT vs. Reliance Industries Ltd.410 ITR 466(SC) that where sufficient own interest free funds were available, presumption is that said funds were used for making interest free advances calling for no disallowance of interest, issue be adjudicated following said proposition.

 

Sufficiency of own funds was pointed out by assessee ,and further considering order of it is fit to restore this issue back to A.O. to adjudicate issue afresh in light of aforesaid submissions made by assessee.

 

With this, the matter was remanded back by ITAT.

 

 

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