2016 (2) TMI 113 - AT - Income Tax

Disallowance of interest expenditure - nexus between the impugned interest income vis- -vis the interest expenditure - Held that - CIT(A) has treated the assessee s fixed deposit income of ₹ 22.5 lacs under the head other sources to be exempt. His claim of corresponding interest expenditure made u/s 57(III) qua any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income has been accepted. We have already given details of the same in the preceding paragraphs. The Assessing Officer invoked the impugned disallowance quoting assessee s failure in proving nexus between the impugned interest income vis- -vis the interest expenditure. The lower appellate authority follows case law of SA Builders (2006 (12) TMI 82 - SUPREME COURT ) accepting plea of commercial expediency involved in a case of borrowed funds being advanced to a sister concern without charging interest. The same is nowhere applicable qua the facts of the instant case wherein no nexus between the impugned income and interest is forthcoming. Thus, we accept Revenue s arguments. The Assessing Officer s findings disallowing the impugned interest expenditure are accordingly restored. - Decided in favour of revenue

Summary

Issues Involved:

1. Disallowance of interest expenditure of Rs. 10,38,237/-.
2. Levying interest under section 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure of Rs. 10,38,237/-:

The Revenue's sole substantive ground challenges the lower appellate order deleting the disallowance of interest expenditure of Rs. 10,38,237/- made by the Assessing Officer (AO) in the order dated 24-12-2009. The case file indicates that this is the second round of litigation between the parties on the very issue before the tribunal. The assessee filed his return on 31-07-2001, stating income of Rs. 13,28,020/- from salary and other sources. The AO completed a regular assessment on 29-03-2004, disallowing the impugned interest expenditure claimed against fixed deposits income of Rs. 22,50,000/- held with Oriental Bank of Commerce, Surat, declared under the head "other sources." The CIT(A) reversed the AO's action. The Revenue filed ITA 550/Ahd/2005 before the tribunal, and a co-ordinate bench in its order dated 11-09-2008 remitted the issue back to the assessing authority.

In the consequential proceedings, the AO was of the view that the assessee's interest claim of Rs. 10,38,237/- (Rs. 5,15,245/- paid to the bank on current a/c. No. 91890 and Rs. 5,22,986/- pertaining to Shri Shyam K. Agrawal @ 10.5% on unsecured loans of Rs. 90 lacs) did not have any nexus with the above-stated interest income declared under the head "other sources" u/s 57 of the Act. He accordingly disallowed the same in the consequential order passed on 24-12-2009.

The CIT(A) observed that the assessee had his own capital of Rs. 4,08,20,480/-, with major investments of Rs. 2 Crores in FDR of OBC, Surat, and Rs. 1.86 Crores in Alfa Plastomers P. Ltd. The assessee claimed interest expenses of Rs. 5,22,986/- being interest paid on unsecured loans but did not charge interest from parties to whom huge amounts were given as interest-free loans. The CIT(A) found that the assessee had sufficient interest-free funds available, far exceeding the interest-free advances, and thus, the disallowance was not justified. The CIT(A) relied on judicial pronouncements, including the decision of the Hon'ble Supreme Court in the case of S.A. Builders 288 ITR 1 (SC), to delete the addition made by the AO.

However, the tribunal found that the CIT(A) treated the assessee's fixed deposit income of Rs. 22.5 lacs under the head "other sources" to be exempt and accepted the claim of corresponding interest expenditure made u/s 57(III) without proving the nexus between the impugned interest income and interest expenditure. The lower appellate authority's reliance on the case law of SA Builders was found inapplicable to the facts of the instant case. Thus, the tribunal accepted the Revenue's arguments and restored the AO's findings disallowing the impugned interest expenditure of Rs. 10,38,237/-.

2. Levying Interest Under Section 234D:

The CIT(A) noted the assessee's contention that the AO erred in levying interest u/s 234D of the Act retrospectively, for a period when the said section was not even in the statute. However, this issue was not elaborated upon in the tribunal's judgment, and the primary focus remained on the disallowance of interest expenditure.

Conclusion:

The Revenue's appeal was allowed, and the order pronounced in the open court on 21-10-2015 restored the AO's findings disallowing the impugned interest expenditure of Rs. 10,38,237/-.