2019 (3) TMI 90 - AT - Income Tax

Addition of interest income - advances given - assessee has failed to prove commercial considerations involved in giving such advances - diversion of loan funds for giving impugned advances - lack of clarity - HELD THAT - It is not a case of addition of Notional interest income. Before us, the assessee has not furnished the copies of financial statements and hence we are unable to appreciate the contention of the assessee. In addition to the above, the assessee has also furnished a copy of ledger account to submit that there are business dealings between the assessee and M/s TIPL. A perusal of the same would show that the assessee appears to have sold some properties to M/s TIPL and received money in installments, while the issue before us is with regard to the advances given by the assessee to M/s TIPL. In any case, this ledger account copy and the nature of business transactions have not been examined by CIT(A). There is lack of clarity on the facts surrounding the issue. The assessee claims that it has not diverted any loan funds for giving impugned advances and it has used only its rental income proceeds for giving the advances. However, CIT(A), after analyzing the financial statements of the assessee, has given a finding that the assessee does not possess interest free funds equivalent to or in excess of the advance given. A.R also submitted that the quantum of advance mentioned by the tax authorities is not correct. This issue requires fresh examination at the end of CIT(A) by providing one more opportunity to the assessee to substantiate its case. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Challenging addition of interest income by AO and confirmed by CIT(A) in Assessment Years 2005-06 to 2007-08.

Analysis:
1. The appeals were filed by the assessee against the orders of CIT(A) confirming the addition of interest income made by the AO in all three years. The assessee contended that the advances given to M/s. Topaz Investments Pvt. Ltd. were for commercial purposes related to acquiring properties, and no interest was charged based on commercial expediency.

2. The AO added interest income for all three years, as the assessee failed to prove the commercial expediency of the advances. The CIT(A) upheld the additions, citing lack of evidence of business purpose and reliance on a Karnataka High Court decision confirming disallowance of interest in a similar case involving real estate business.

3. The CIT(A) observed that the assessee's own funds were insufficient compared to the advances given, rejecting the claim that the advances were made from interest-free funds. The AR argued that the advances were commercial, supported by ledger accounts, and disputed the quantum of advances considered by tax authorities.

4. The Tribunal noted discrepancies in the assessment and CIT(A) findings, lack of clarity on fund sources for advances, and the need for further examination. The Tribunal set aside CIT(A)'s orders, directing a fresh examination with the opportunity for the assessee to substantiate its case.

5. The Tribunal did not address the challenge to the validity of assessment reopening in AY 2006-07 and 2007-08 due to the lack of arguments from the assessee. Consequently, all appeals of the assessee were treated as allowed for statistical purposes.

This detailed analysis covers the issues raised in the legal judgment, providing a comprehensive overview of the arguments, decisions, and directions given by the authorities involved in the case.