In Deputy Commissioner of Income-taxvs. Gujarat Narmada Valley Fertilizers Co. Ltd., it was held that the assessee having the interest free funds and also no interest bearing loan was used for non-business purpose then the interest expense shall not be disallowed.

Facts of the case:

The assessee is a company engaged in the business of manufacturing of fertilizers, various chemicals and information technology business.

• The assessee company had advanced various interest free loans to the subsidiaries and associate concerns. The assessee was also paying heavy interest on the secured and unsecured loans. During the assessment proceedings, the Assessing Officer asked the assessee to furnish the details of interest free advances along with the reasons and to prove that the money was advanced as a measure of commercial expediency.

On this, the assessee submitted that during the year no advances  were made to the subsidiaries. The assessee also explained the  advances given to three partners. The AO rejected the explanation provided by the assessee and thus, disallowed the claim related to the interest payment.

The assessee went for the appeal to the Commissioner (Appeals). On reviewing the matter, the Commissioner (Appeals) allowed the claim               of interest payment.

• The assessee made an investment in UTI and shares of domestic companies from which the assessee earned dividend income. The assessee submitted that it did not incur any expenditure to earn tax free dividend income.

The Assessing Officer rejected assessee’s explanation and disallowed by invoking provisions of section 14A.

On appeal to the Commissioner (Appeals), it was allowed.

The Revenue appealed to the ITAT.

It was held that:

• The Tribunal noticed that the loans and advances to the subsidiaries and associates was same as that on the last day of the previous year. It indicates that no fresh advances were made during the year. From the balance sheet of the year, it was clear that the assessee was having sufficient interest free funds at its disposal. Further, there was no such evidence to support that the loan taken for the purpose the business was used for non business purpose and the nexus between interest bearing loans and interest free advances has not been proved by the Assessing Officer.
• The interest free funds available with the assessee were in excess of the investments. Also, the AO had not given a specific finding with respect to the expenditure incurred by the assessee for earning tax free income.

Thus, in the present case, no addition under section 14A can be    made.

Therefore, there is no reason to interfere with the order of the Commissioner (Appeals) and appeal of the revenue is dismissed.