2013 (2) TMI 532 - AT - Income Tax

Interest free Loans and Advances Whether interest expenditure being relatable to interest free advances made out of interest bearing funds should be allowed or not Assessee had shown loans and advances to the tune of Rs.6,24,61,649 Assessee was paying interest on the loans received by it, but no interest was charged on the aforesaid advances Held that - Section 36(1)(iii) of the Income Tax Act, 1961, provides for deductions of interest on loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee were used by business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be a very heavy onus on the assessee to discharge before the AO to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(iii) of the Act. Even where the interest free advances were made in the earlier years and the assessee incurs the liability of interest expenditure on secured loans in the later years Interest relatable to such interest free advances is to be disallowed. The first advance is on account of amount outstanding under the head M/s Rassini totaling Rs.31,86,478 Explanation of the assessee was that it was proposing to enter into a joint venture with M/s Rassini certain expenditure incurred by its employees/Directors during the financial years 2000-01 to 2004-05 was not booked under the Profit & Loss Account but was booked under the head Rassini And was reflected under Loans & Advances on the asset side of the balance sheet Assessee had furnished an application under Rule 29 of the Tribunal Rules alongwith additional evidence i.e. correspondence between the assessee and M/s Rassini during the period 2001 to 2004 to establish its claim of proposal and entering into a joint venture agreement This issue was restored back to AO to re-decide taking into consideration the additional evidence sought to be furnished by the assessee before us under Rule 29 of the Tribunal Rules The issue is thus set aside to the file of the AO for statistical purposes. In respect of the advances due from different parties - were made interest free - The assessee has failed to file any evidence to prove the business expediency in respect of the said advances - The assessee has failed to controvert the findings of the CIT (Appeals) - Interest relatable to the advances made to M/s A.Nitin & Co. held to be disallowable. In respect of M/s Associated Capital Market, there was a transfer entry to the said account - Transaction could not be established by the assessee being for the purpose of business - The interest on such advances is to be disallowed under section 36(1)(iii) of the Act. Explanation of the assessee that it had advanced Rs.3,56,838/- to Fatu S/o Imamuddin for purchase of factory land could not be established by the assessee In the absence of any evidence the interest on the said advances disallowed. Advances due from different parties - It were made interest free - Assessee failed to file any evidence to prove the business expediency in respect of the these advances Therefore Disallowed. Advances of to M/s Bliss Holding Pvt.Ltd.,to M/s Penwell Ltd. and to M/s Novika Investment and Trading Co.Ltd. - It were on account of interest overcharged - Necessary certificates were furnished in this regard - where the interest was excess charged by the assessee and the amount was shown as receivable from the said parties and the same did not relate to the principal loan advanced to the parties - No disallowance is warranted out of such outstanding amounts. Appeal of the assessee partly allowed and the appeal of the Revenue dismissed

Summary

Issues Involved:
1. Disallowance of interest expenditure sustained by the CIT (Appeals).
2. Relief granted by the CIT (Appeals) on account of interest expenditure.

Detailed Analysis:

1. Disallowance of Interest Expenditure Sustained by the CIT (Appeals):

a) Advance to M/s Rassini (Rs.31,86,478/-):
The assessee explained that the expenses were incurred for a proposed joint venture with M/s Rassini, which did not materialize. The CIT (Appeals) noted that no joint venture agreement was produced, and thus the expenses were not justified as business expenses. The Tribunal, however, restored the issue to the Assessing Officer (AO) to reconsider after examining additional evidence provided by the assessee.

b) Advances to M/s A.Nitin & Co. (Rs.52,94,846/-) and M/s Associated Capital Market (Rs.9,00,000/-):
The assessee claimed these were for share transactions. The CIT (Appeals) found the accounts unverifiable, and the Tribunal upheld the disallowance due to lack of evidence proving business purpose.

c) Advance to Fatu S/o Imamuddin (Rs.3,56,838/-):
The assessee claimed this was for purchasing factory land, but failed to provide supporting documents. The CIT (Appeals) and Tribunal upheld the disallowance.

d) Advances to Various Parties:
The assessee failed to verify business purposes for advances to:
- Jai Spring Industry and Investment (Rs.1,00,000/-)
- Maple Leaf Exim Pvt. Ltd. (Rs.1,00,000/-)
- Sonakshi Marketing Pvt. Ltd. (Rs.25,00,000/-)
- Mars Global Logistics Pvt. Ltd. (Rs.1,43,875/-)

The Tribunal upheld the CIT (Appeals) decision to disallow interest on these advances.

2. Relief Granted by the CIT (Appeals) on Account of Interest Expenditure:

a) Advances to M/s Bliss Holding Pvt. Ltd. (Rs.26,17,604/-), M/s Penwell Ltd. (Rs.68,97,811/-), and M/s Novika Investment and Trading Co. Ltd. (Rs.1,51,47,889/-):
The CIT (Appeals) accepted the assessee's explanation that these amounts were due to interest overcharged, supported by certificates from the respective parties. The Tribunal agreed with the CIT (Appeals) that no disallowance was warranted, as these did not relate to principal loans.

Conclusion:
The Tribunal partly allowed the assessee's appeal by remanding the issue of the advance to M/s Rassini for reconsideration by the AO. The Tribunal upheld the CIT (Appeals) decision on disallowing interest on advances to M/s A.Nitin & Co., M/s Associated Capital Market, Fatu S/o Imamuddin, and other parties due to lack of evidence. The Tribunal dismissed the Revenue's appeal, agreeing with the CIT (Appeals) that no disallowance was warranted for interest overcharged to M/s Bliss Holding Pvt. Ltd., M/s Penwell Ltd., and M/s Novika Investment and Trading Co. Ltd.