Assistant Commissioner of Income Tax v. Panorama Studios Private Limited

Parties Involved

Facts Summary

The Assessee, a private limited company engaged in the business of film distribution and distribution of cinematographic films and digital content, filed return of income for the Assessment Year 2018-19 on 31/10/2018. The case of the Assessee was selected for regular scrutiny. During the Assessment proceedings, the Assessing Officer noted that the Assessee had incurred financial cost aggregating to INR 1,75,89,407/- in respect of long term borrowings (closing balance INR 1,72,69,892/-) and short term borrowings (closing balance INR 13,03,13,681/-). The Assessee had also shown advances aggregating to INR 21,62,19,091/- to related parties. The Assessing Officer was of the view that the interest bearing funds have been given to the related parties as interest free loan/advance. Therefore, financial cost related to such funds should be disallowed in the hands of the Assessee in terms of Section 36(1)(iii) read with Section 37 of the Act. Accordingly, the Assessing Officer made disallowance of INR 1,75,89,407/-, being entire financial cost debited to the Profit & Loss Account for the relevant previous year, while passing the Assessment Order, dated 15/04/2021. Being aggrieved the Assessee carried out this issue in Appeal before CIT(A). The CIT(A) agreed with the Assessee and deleted the disallowance of finance cost of INR 1,75,89,407/- made by the Assessing Officer observing that the advances to related parties were strategic and had a clear business rationale.…

Legal Issues

• 1. Whether on the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made of Rs.1,75,89,407/- under Section 36(1)(iii) of the Income Tax Act, 1961 ignoring that loan borrowed used for advancing interest free loans to related parties not a business expenditure not an allowable expense for deduction under Section 36(1)(iii) of the Act.

Judgment Outcome

Decided in favour of Partly Assessee / Partly Revenue.

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