2016 (10) TMI 251 - HC - Income Tax

Disallowance of interest - addition u/s 36(1)(iii) - whether transactions are arising out of commercial expediency & business exigencies Held that - Tribunal upheld the Assessing Officer s finding that the unsecured loans of ₹ 588.79 lacs were not available to the assessee. It is difficult to understand the basis for this finding as the Tribunal has not considered the assessee s records which the assessee contends indicate the contrary. The assessee contends that the amounts have been received by him by cheque from persons who are on assessee s records. Having said that, we must point out that the assessee s balance-sheet is not very clear in this regard. The amount of about ₹ 5.38 crores is shown as against the name of M/s Garg Infrastructure Private Limited under the heading Other Liabilities . It is for the assessee to explain that it really is nothing but an interest free loan. If it is an interest free loan, it would make all the difference to the assessee s case. It is not very clear whether this was so stated to the CIT (Appeals) and to the Tribunal or not. In the facts and circumstance of this case, the ends of justice, however, would be met by affording the appellant an opportunity of having the matter re-heard before the Tribunal.The matter is remanded to the Tribunal for a fresh decision after affording the appellant an opportunity of being heard.

Summary

Issues:
Appeal against Tribunal's order on CIT (Appeals) decision for assessment year 2009-2010. Substantial questions of law: (I) Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961, in relation to interest-free money advanced for interest-free purposes, and (II) Interpretation of Section 57(iii) for claiming expenditure on earning interest under income from other sources.

Analysis:
1. The CIT (Appeals) upheld the disallowance of interest claimed under Section 36(1)(iii) amounting to ?22,96,865. The appellant had submitted detailed written arguments, but the order did not consider them properly. The CIT (Appeals) noted that the borrowed amount was used for working capital but held that the interest paid could not be proven to have been used for business purposes, which seemed contradictory.

2. The Tribunal observed that the appellant had overdrawn from the capital account with a debit balance of about ?2.28 crores, while unsecured loans were only ?36 lacs. The Tribunal agreed with the Assessing Officer that unsecured loans of ?588.79 lacs were not available to the assessee, without clear basis. The appellant claimed to have received amounts via cheques from individuals on record, but the balance-sheet was not clear. An amount of ?5.38 crores under "Other Liabilities" needed clarification if it was an interest-free loan.

3. The High Court set aside the impugned order and remanded the matter to the Tribunal for a fresh decision, granting the appellant an opportunity to be heard. The Court found that justice would be served by rehearing the case before the Tribunal, ultimately disposing of the appeal accordingly.