2013 (4) TMI 34 - AT - Income Tax

Interest u/s 36(1)(iii) - interest free loan to related parties - as per AO the interest bearing funds have been utilized by the assessee to give interest free loans and advance as the assessee has paid interest of 12% to other person on unsecured loan but no interest was charged on loans and advances which have been given to Amritlal R. Patel, Tarang Plast corporation and Security deposit-NL Account - Held that - From the copy of the ledger account of security deposit placed on record it is seen that the assessee was entitled to receive incentive of Rs.13,97,394/- for the period April, 2006 to March, 2007 and the same was reflected in the security deposit account. The credit note of Nirma Ltd. also states that the amount is credited to the incentive deposit account. From these facts, it is clear that the amount appearing as security deposit is not in the nature of any amount advanced as loan or deposit by the assessee but is in the nature of receivable. In view of these facts, no disallowance on account of notional interest can be made as far as amount of security deposit is concerned. With respect of advance to Amritlal R. Patel (Rs. 150057/-) and Tarang Plast corporation (Rs.1,35,972) is concerned, the assessee has given a general statement that it is on account of business expediency but has not placed any evidence to substantiate it. The perusal of the ledger account in case of Tarang Plast reveals that the balance of Rs.1,35,972/- is an opening balance without any transactions during the year. In case of Amritlal Patel, the opening balance receivable at the beginning of the year was to the extent of Rs.4,58,000/- and on account of repayments made during the year, the balance as on 31st March, 2007 was of Rs.150057/-. Assessee could not substantiate its stand with respect to the commercial expediency nor could it demonstrate by means of any evidence that the amounts have been lent out of interest free funds. In view of these facts the A.O. s action in making disallowance on account of interest in case of Amritlal Patel and Tarang Plast Corporation cannot be faulted - the addition on account of interest in case of security deposit is directed to be deleted. Assessee s appeal is partly allowed.

Summary

Issues: Disallowance of interest u/s 36(1)(iii) of Rs.2,01,950/-

Detailed Analysis:
1. Facts of the Case: The case involved an appeal by the assessee against the order of the ld. CIT(A)-XX, Ahmedabad, regarding the disallowance of interest under section 36(1)(iii) amounting to Rs.2,01,950/-. The assessee, a trust engaged in trading FMCG products, had filed its income tax return declaring a total income of Rs.16,26,650/-.

2. Grounds Raised: The only effective ground raised by the assessee was related to the disallowance of interest under section 36(1)(iii) of the Income Tax Act.

3. AO's Observations: The Assessing Officer noted that the assessee had debited interest of Rs.34,18,865/- to its Profit and Loss Account, while also receiving interest of Rs.22,92,233/-. The AO found discrepancies in interest charged on loans given to certain parties without charging interest, leading to the disallowance under section 36(1)(iii).

4. CIT(A)'s Decision: The CIT(A) upheld the AO's order, stating that the appellant failed to provide sufficient evidence to justify the non-charging of interest on certain loans. The CIT(A) confirmed the disallowance of Rs.2,01,950/-.

5. Assessee's Arguments: The assessee argued that the security deposit NL Account was not a loan or advance but an incentive from Nirma Ltd. for exceeding sales limits. The advances to other parties were for business expediency and maintaining relationships. The assessee provided evidence to support these claims.

6. ITAT's Decision: The ITAT analyzed the nature of the security deposit and advances given, concluding that the security deposit was not an interest-free advance but a receivable incentive. However, the ITAT found the lack of evidence to support the business expediency claim for the advances to other parties. Thus, the disallowance of interest on those advances was upheld, while the disallowance related to the security deposit was deleted.

7. Conclusion: The ITAT partially allowed the assessee's appeal, deleting the disallowance related to the security deposit but upholding the disallowance of interest on advances to certain parties.