2015 (9) TMI 174 - AT - Income Tax

Disallowance interest/ bank charges paid to bank on overdraft - Held that - It is a fact that whatever names mentioned by the ld. CIT(A) in his findings were the loanee in preceding years. Therefore, the ld. CIT(A) s finding is totally wrong. However, the AO s findings in case of M/s. Mittal Pigment (P) Ltd. and M/s. Gaurav (P) Ltd. were found correct that during the year under consideration the assessee had given ₹ 60 lacs on CD A/c maintained with HDFC Bank bearing A/c no. 1672070000032 on 12-12-2005 to M/s. Mittal Pigment (P) Ltd. and ₹ 1.50 crores to M/s. Gaurv (P) Ltd. on 17-01-2006 from the bank saving a/c No. 450101 423915 maintained with Rajasthan Bank Ltd., Kota. The assessee has transferred ₹ 43 lacs from CD A/c of HDFC Bank, Kota to A/c No. 1672070000032 on 1-02-2005 in the bank maintained with Rajasthan Bank Ltd., Kota. The assessee had not charged any interest. It is undisputed fact that the assessee had paid bank interest of ₹ 472,324/- which includes interest paid to HDFC Bank, Kota at ₹ 1,21,214/- and SBI, Chawni Branch, Kota at ₹ 3,51,110/- which has been directly adjusted by the assessee against interest income. The AO had established the nexus that the assessee had borrowed the funds on interest and advance the interest free loans to the sister concerns or other concerns. Thus in view of the above deliberations, we confirm the order of the ld. CIT(A). - Decided against assessee.

Summary

Issues:
Disallowance of interest/bank charges paid to bank on overdraft.

Analysis:
The appeal was filed against the order of the CIT(A) for the assessment year 2006-07 regarding the disallowance of interest/bank charges paid to the bank on overdraft. The AO observed that the assessee showed net income from other sources at Rs. 24,33,573/- and had reduced income from bank interest and loans by Rs. 4,80,069/- due to bank charges. The AO found that the bank overdrafts were mainly due to interest-free advances given to sister concerns or other parties. The AO issued a show cause notice, and the assessee claimed that the advances were from self capital, not borrowed capital. The AO disallowed the interest payment and bank charges, relying on various case laws. The CIT(A) partly allowed the appeal, restricting the disallowance to 50% of the amount. The assessee argued that the loans were not advanced during the year under consideration and relied on case laws to support the claim. However, the Tribunal confirmed the CIT(A)'s order, stating that the loans were advanced during the relevant year from borrowed funds, leading to the disallowance of interest payment and bank charges.

The Tribunal found that the loans to sister concerns were given during the year under consideration from borrowed funds, as evidenced by transactions with specific dates. The assessee had not charged any interest on these loans, leading to the disallowance of interest payment and bank charges. The Tribunal upheld the CIT(A)'s decision, dismissing the appeal of the assessee.

In conclusion, the Tribunal affirmed the disallowance of interest/bank charges paid to the bank on overdraft, as the loans to sister concerns were given from borrowed funds without charging interest. The Tribunal found a nexus between the borrowed funds and interest-free advances, leading to the dismissal of the appeal.