2013 (6) TMI 332 - AT - Income Tax

Addition in respect of interest payment - disallowance u/s 36(1)(iii) - Held that - It is an admitted fact that the assessee gave Rs. 9.33 lacs loan / advances to three of his friends namely Sri Kastrichand Pvt. Ltd. (Rs. 3,83,000/-), Mahesh Ahuja (Rs. 4,50,000/-) and Advance Samata Anand (Rs. 1,00,000/-). It is also a fact that out of the interst bearing loans, the assessee received Rs. 11.6 lacs from Tarachand Kashyap, HUF which is used for the purpose of acquiring a business asset. Thus, the interest claim of Rs. 92,912/- directly relates to the said loan of Rs. 11.6 lacs. Thus, the balance of Rs. 38,529/- is an interest paid to the banks which is open to disallowances. The assessee has not demonstrated as to the relatable interest bearing loans and the manner of appropriation of the said loans. In the absence of the same, the only presumption is that the said loans from Kotak Mahendre Bank and DCB are utilized for lending to the said three parties for non business purpose. Ratio of S.A. Builders vs. CIT case (2006 (12) TMI 82 - SUPREME COURT) is relevant here and the advances of Rs. 9.33 lacs were given outside the purview of the established concept of commercial expediency . Thus disapproving the estimation method adopted by the CIT(A) in making disallowance restricting to Rs 93,300/-. Therefore, restricting the disallowance to Rs. 38,529/- should meet both ends of justice - grounds raised by the assessee are partly allowed.

Summary

Issues involved: Appeal against the order of CIT (A) regarding the addition of interest paid, interpretation of provisions of section 36(1)(iii) of Income Tax Act, 1961.

Analysis:

1. Background and Assessment: The assessee, engaged in liaison work and merchandising, filed a return declaring income of Rs. 6,09,290. The assessment under section 143(3) resulted in an assessed income of Rs. 7,61,190, with disallowances including car expenses, staff welfare, and interest paid on loans totaling Rs. 1,51,900. The appeal was filed against the CIT (A) order dated 29.10.2010 for the assessment year 2006-2007.

2. Grounds of Appeal: The primary contention in the appeal was the addition of Rs. 93,300 in interest paid, contrary to the provisions of section 36(1)(iii) of the Income Tax Act, 1961. The dispute centered on the disallowance of interest related to loans given for non-business purposes to friends, with the CIT (A) confirming a partial disallowance.

3. Arguments and Analysis: The assessee's representative argued that the interest expenditure was linked to specific loans provided to friends, emphasizing the purpose of the loans and the utilization of funds for business assets. The CIT (A) partially allowed the appeal, restricting the disallowance to Rs. 93,300 based on an estimation method. The Tribunal noted the lack of details regarding the loans from banks and their connection to interest-free advances, leading to the conclusion that the disallowance should be limited to Rs. 38,529, meeting the requirements of section 36(1)(iii).

4. Judgment and Conclusion: The Tribunal considered the commercial expediency aspect and disapproved of the estimation method adopted by the CIT (A), favoring a reduced disallowance of Rs. 38,529. Citing the precedent of S.A. Builders vs. CIT, the Tribunal found that the loans given were outside the scope of commercial expediency, justifying the revised disallowance amount. Consequently, the appeal was partly allowed, with the final order pronounced on 5.6.2013.