Disallowance u/s 36(1)(iii) shall not be made if interest free loan is given to a relative out of free reserves : P&H HC

In a recent decision, Hon’ble Gujarat High Court held that:

The appellant’s case is that an amount of 8.89 crores was advanced by the respondent/assessee to his son. The assessee on the other hand contends that during the AY in question 2008-2009, only about Rs. 2.14 crores was advanced by him to his son. It would make no difference. The Tribunal has rightly upheld the detailed and reasoned order of the CIT (A). The CIT (A) has analyzed the cash available with the respondent. It was not the case of the AO that the assessee had diverted the funds borrowed on interest for the purpose of advancing the sum to his son for business. The Tribunal noted that the AO had in fact accepted that no such borrowed funds had been diverted/advanced by the assessee to his son. There was no nexus between the funds borrowed by the assessee and the funds diverted/advanced to his son. There were free reserves available with the assessee to advance the interest free loan to his son. It is not possible to hold that the appreciation of these facts was perverse or absurd. No question of law, therefore, arises in this regard either.

For complete text of judgement, click here Rakesh Gupta

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