2020 (4) TMI 407 - AT - Income Tax

Disallowance of interest u/s. 36(l)(iii) - interest paid on secured and unsecured loan - Whether appellant had no interest free funds out of which the appellant could give interest free loans? - HELD THAT - For A.Y. 2010-11 disallowance has been correctly made by AO - Assessee s claim of interest free funds is not at all tenable as the same is claimed to be in the form of outstanding liability for goods and expenses. This fact is further highlighted by the fact that sundry debtors outstanding in the books are more than this outstanding liability. Hence, assessee s claim of interest free funds is not sustainable. Submission that these are purchase advances have not at all been proved. Furthermore, assessee itself started charging interest on these loans in subsequent years. Hence, order for A.Y. 2010-11 is duly sustained. For A.Y. 2013-14 also position is similar. No evidence whatsoever of subsequent purchases have been produced. Hence, claim that these parties are purchase advances is not at all proved. Furthermore, for a part plea of interest free advances is not sustainable on the same basis as in the earlier year as sundry creditors for goods and expenses cannot be claimed to be interest free funds available with the assessee. More so, as sundry debtors are much more than this. However, the assessee s plea of partner s current capital for A.Y. 2013-14 to the extent of ₹ 43,97,689/- needs to be examined. Assessing Officer has not given proper reason as to why this cannot be considered to be interest free funds available. Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT has duly expounded that when assessee has interest free funds, assessee can be given credit thereof and assessee need not show one to one nexus of interest free funds and deployment thereof. Hence, in my considered opinion assessee s appeal for A.Y. 2013-14 deserves to be set aside to the file of the Assessing Officer for limited purpose of examination of interest free funds in the shape of current capital amounting to ₹ 43,97,689/- is available to grant interest free advances. The Assessing Officer shall examine this aspect in the light of observation as above and if interest free funds in this regard are available, assessee deserves to be granted proportionate relief.

Summary

Issues:
- Disallowance of interest under section 36(1)(iii) for Assessment Year (A.Y.) 2010-11
- Disallowance of interest under section 36(1)(iii) for A.Y. 2013-14

Analysis:
1. Disallowance of interest under section 36(1)(iii) for A.Y. 2010-11:
- The Assessing Officer disallowed interest claimed on loans, asserting that the assessee lacked interest-free funds to provide interest-free loans. The assessee argued that outstanding liabilities for goods and expenses constituted interest-free funds, but failed to prove this. The Assessing Officer found no evidence supporting the claim that these were purchase advances. The CIT(A) upheld the disallowance.
- The ITAT concurred with the lower authorities, stating that the claim of interest-free funds was untenable as the outstanding liabilities did not qualify as such. Moreover, the lack of proof for purchase advances and subsequent interest charges on the loans supported the disallowance. The order for A.Y. 2010-11 was upheld.

2. Disallowance of interest under section 36(1)(iii) for A.Y. 2013-14:
- The Assessing Officer disallowed interest on loans, rejecting the claim of interest-free funds based on outstanding liabilities. The CIT(A) affirmed this decision. However, the ITAT found the situation similar to the previous year, with no evidence of subsequent purchases to support the claim of purchase advances. While most of the claims were unsustainable, the plea regarding partner's current capital needed further examination.
- Referring to a Bombay High Court case, the ITAT highlighted that interest-free funds need not have a direct nexus with their deployment. It directed the Assessing Officer to reevaluate the partner's current capital as potential interest-free funds. If found valid, proportionate relief should be granted. The dismissal of the claim as purchase advances was maintained.

In conclusion, the ITAT dismissed the assessee's appeal for A.Y. 2010-11 but partially allowed the appeal for A.Y. 2013-14, remanding the case to the Assessing Officer for further examination.