2017 (5) TMI 1511 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) for making interest free advance to various persons - Held that - We find that it is a fact that in original assessment proceedings, the Assessing Officer had made disallowance of interest u/s 36(1)(iii) in respect of 10 parties , whereas the Assessing Officer in the second round of proceedings examined 14 parties and made disallowances accordingly which is not as per directions of Hon ble ITAT. Therefore, we direct the Assessing Officer to restrict the disallowance if any in respect of only 10 parties which were originally listed in the original assessment order. We further find that in a few cases, the amount of advances was as opening balances and there are judgments of Amritsar Tribunal holding that in respect of old advances from earlier years, no disallowance u/s 36 (1) (iii) was warranted. Further the disallowance if any u/s 36(1)(iii) has to be restricted to the amounts of loans which exceeded the capital of the assessee as has been held by Hon ble Amritsar Bench in various case laws relied on by assessee. Therefore, the Assessing Officer is directed to restrict the disallowance of interest on loan amounts exceeding the available capital of the assessee. With these directions the appeal of the assessee is set aside to the office of Assessing Officer to reframe the assessment order in terms of above said directions. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
- Disallowance of interest u/s 36(1)(iii) of the Act for interest-free advances to various persons
- Examination of 14 parties instead of 10 as per directions of Hon'ble ITAT
- Treatment of old advances from earlier years
- Disallowance restricted to loan amounts exceeding the available capital of the assessee

Analysis:
The appeal was filed against the order of Ld. CIT (A) concerning the disallowance of interest u/s 36(1)(iii) for providing interest-free advances. Initially, the Assessing Officer disallowed interest on loans to 10 parties. However, the Hon'ble ITAT directed a reexamination of each ledger account individually. Subsequently, the Assessing Officer reexamined 14 accounts and made disallowances. The appellant contended that the reexamination should have been limited to the original 10 parties. Additionally, the appellant argued that old advances from previous years should not warrant disallowance, citing relevant case law.

During the proceedings, the appellant highlighted that the disallowance should be limited to loan amounts exceeding the available capital. The appellant relied on various judgments to support this argument. Conversely, the Ld. DR supported the orders of the authorities below. After considering the arguments, the Tribunal found that the Assessing Officer's examination of 14 parties deviated from the ITAT's directions. Therefore, the Tribunal directed the Assessing Officer to restrict any disallowance to the original 10 parties. The Tribunal also noted that old advances may not warrant disallowance, as per Amritsar Tribunal judgments.

Furthermore, the Tribunal emphasized that any disallowance under section 36(1)(iii) should be limited to loan amounts exceeding the assessee's capital. This direction was supported by various case laws cited by the appellant. Consequently, the Tribunal allowed the appeal for statistical purposes, setting it aside for the Assessing Officer to reframe the assessment order based on the provided directions.