Bangalore ITAT Cancels Disallowance of Interest-Free Advances to Sister Concern of Assessee u/s 36(1)(iii)

The Bangalore Bench of the Income Tax Appellate Tribunal ( ITAT ) in a ruling quashes the disallowance u/s 36(1)(iii) of the Income Tax Act, 1961, on interest-free advances provided to the assessee’s sister concern.

For the case when the taxpayer Deccan Charters Pvt. Ltd., a company in the aviation services business based in Bengaluru filed its Income Tax Returns for the assessment year ( AY ), reporting a total loss of Rs. 10,93,70,970.

The assessing officer ( AO ) observed in the investigation that the taxpayer has furnished interest-free advances to related concerns while paying interest on borrowed loans. Post analyzing the information given by the taxpayer, AO disallowed Rs 2.56 crore under section 36(1)(iii) of the Income Tax Act.

Dissatisfied with the order of the AO the taxpayer appealed to the Commissioner of Income Tax ( Appeals ). The taxpayer’s submission has been rejected by the CIT(A) that the impugned advances were extended by the taxpayer to its sister concern, M/s. Deccan Emerging Business Ventures Pvt. Ltd., in the financial year pertinent to AY 2012-13 carried the AO decision.

It was argued by the taxpayer that the advance had not been furnished in the year under consideration and that the balance represented is the outstanding carried forward from the previous years.

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On behalf of the taxpayer, the council argued that the due advance to the sister concern has lowered to Rs. 22.54 crore from Rs. 38.47 crore in 2018, which makes the disallowance u/s 36(1)(iii) of the Income Tax Statute on grounds that inadequate own funds were not available was not tenable.

The counsel mentioned on behalf of the respondent that the taxpayer could not take cover based on the fact that when the advance was extended, the taxpayer had enough funds.

No new advance was extended to the sister concern, ITAT bench discovered merit in the contention of the taxpayer.

The ITAT bench, George George K ( Vice President ) and Padmavathy S. ( Accountant Member ) permitted the appeal filed by the taxpayer and carried that the AO was erroneous in making the disallowance u/s 36(1)(iii) of the Income Tax Act, 1961, and asked the AO to remove the disallowance.