2020 (9) TMI 85 - AT - Income Tax

Disallowance u/s 36(1)(iii) on account of diversion of interest-bearing fund - HELD THAT - Assessee has agreed for the disallowance of the amount of interest on the amount diverted as interest-free loans and advances. As such the issue is limited to the extent of the rate of interest which needs to be applied on such interest-free loans and advances. As per the revenue the average rate of interest is 11.45% whereas the assessee claims the same to be at 8.73%. From the order of the AO we find that the assessee in most of the cases has borrowed money on interest at the rate of 12% and in very few cases at the rate of 15% and 10.5 %. Admittedly the assessee has borrowed more amount on interest at the rate of 10.50%. AO has worked out average cost of the borrowed funds at the rate of 11.45% which appears very reasonable and logical in the given facts and circumstances. As such the assessee in none of the case has borrowed fund at the rate of 8.73% as claimed by him as the cost of borrowed fund. Accordingly, we do not find any merit in the argument of the assessee. Thus, we confirm the order of the authorities below. Hence the ground of appeal of the assessee is dismissed.

Summary

Issues:
- Disallowance of interest claimed under section 36(1)(iii) of the Act
- Interpretation of the rate of interest on interest-free loans and advances

Analysis:
1. The appeal was against the order of the Ld. CIT(A)-5, Ahmedabad dated 26.12.2016 for A.Y. 2009-10.
2. The appellant contested the disallowance of interest claimed under section 36(1)(iii) of the Act, arguing that advances were interest-free and not subject to disallowance.
3. The sole issue raised was the confirmation of the disallowance of ?17,20,954/- under section 36(1)(iii) of the Act due to diversion of interest-bearing funds.
4. The AO found that the assessee diverted interest-bearing funds for interest-free loans, resulting in the disallowance.
5. The CIT (A) upheld the AO's decision, leading to the appeal before the ITAT.
6. The appellant argued for a lower rate of interest for the disallowance.
7. The ITAT heard both parties and reviewed the facts and contentions.
8. The ITAT noted the disagreement on the rate of interest between the revenue and the appellant.
9. The average rate of interest was a point of contention, with the revenue at 11.45% and the appellant at 8.73%.
10. The ITAT found the AO's calculation of 11.45% reasonable based on the borrowing rates of the assessee.
11. The ITAT dismissed the appellant's appeal, upholding the authorities' decision on the disallowance.
12. Regarding the delay in pronouncing the order, the ITAT considered the exceptional circumstances of the Covid-19 lockdown and extended the time limit.
13. Ultimately, the ITAT dismissed the appeal of the assessee, pronouncing the order on 01-06-2020.

This detailed analysis covers the issues of disallowance of interest claimed under section 36(1)(iii) of the Act and the interpretation of the rate of interest on interest-free loans and advances, providing a comprehensive overview of the judgment delivered by the ITAT Ahmedabad.