ITAT Bangalore Rules in Favour of Assessee on Interest Disallowance Under Section 36(1)(iii)
Background of the Dispute
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has reiterated an important principle governing disallowance of interest under Section 36(1)(iii) of the Income Tax Act 1961 in the case of ACIT Vs Brigade Enterprises Limited. The central issue in both appeals filed by the Revenue was whether interest expenditure could be disallowed where the assessee had extended interest-free advances or made investments in group entities, allegedly out of “mixed funds”.
The Tribunal, after examining the financial statements and following binding judicial precedents, concluded that when the assessee’s interest-free own funds (such as share capital and reserves) are substantially higher than the amount of interest-free advances or investments, a presumption operates that such advances are sourced from interest-free funds. Consequently, no disallowance under Section 36(1)(iii) is justified in the absence of contrary evidence from the Revenue.
Both appeals by the Revenue for AY 2013-14 and AY 2011-12 were ultimately dismissed.
Appeals Covered by the Common Order
The ITAT disposed of two appeals by the Revenue through a consolidated order, as they involved an identical legal issue and related to the same assessee:
- ITA No. 2486/Bang/2025 – for Assessment Year 2013-14
- ITA No. 2485/Bang/2025 – for Assessment Year 2011-12
In both matters, the Assistant Commissioner of Income Tax, Central Circle – 2(3), Bengaluru challenged the orders of the Commissioner of Income Tax (Appeals) [CIT(A)] which had deleted interest disallowances made under Section 36(1)(iii).
The CIT(A) had relied heavily on the assessee’s own funds position reflected in its balance sheet and on earlier judicial rulings, including the decisions of the Hon’ble Karnataka High Court in the assessee’s own case and Supreme Court rulings such as SA Builders Limited v/s. CIT, CIT v/s. M/s. Core Healthcare Limited, and CIT v/s. Reliance Industries Limited.
Facts – AY 2013-14 (ITA No. 2486/Bang/2025)
Nature of Business and Assessment History
The assessee, M/s. Brigade Enterprises Limited, is engaged in the business of development and construction of residential and commercial real estate projects.
- The assessee filed its return of income for AY 2013-14 on 29.11.2023, declaring income of
Rs. 1,45,82,610/-. - An assessment under
Section 143(3)was initially completed on 30.03.2016, determining total income atRs. 17,28,83,640/-. - The assessee filed an appeal before the CIT(A), which was rejected on 30.08.2019, and the matter was then carried to the ITAT.
In the interim, a search under Section 132 was conducted on 02.11.2017, leading to initiation of proceedings under Section 153A. A fresh assessment under Section 143(3) r.w.s. 153A was completed on 31.12.2019.
One of the principal additions in this assessment was a disallowance of interest expenditure under Section 36(1)(iii), attributed to interest-free advances extended to group entities.
Earlier ITAT Remand and Direction
In an earlier round, the ITAT, vide order dated 11.10.2021 under Section 254, had remitted the matter back to the Assessing Officer with a specific direction:
- To verify the cash flow statement and other financial records,
- To ascertain whether the assessee had sufficient interest-free funds available for making interest-free advances to its sister concerns,
- And to ensure that no disallowance is made if it is established that adequate interest-free own funds exist to cover such advances.
Action by the Assessing Officer on Remand
Pursuant to the remand, the Assessing Officer examined the financial statements of the assessee.