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2021 (10) TMI 795 - AT - Income TaxAddition u/s 36(1)(iii) - interest expenses should be disallowed to the extent of interest free loans and advances given - HELD THAT - Since, the assessee, in the instant case, is in the business of finance and investment and the interest paid is exclusively for earning interest income and such interest income has been included in the total taxable income and further considering the fact that own capital and free reserves of ₹ 5.05 crores is much more than the total investment in shares of ₹ 4.71 crores, therefore, respectfully following the decision of Hon ble Delhi High Court in the case of EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT hold that no disallowance of interest in the instant case is called for - Therefore, set aside the order of the CIT(A) and direct the AO to delete the addition. The ground raised by the assessee is accordingly allowed.
Issues:
1. Disallowance of interest expenses under section 36(1)(iii) of the IT Act. 2. Justification for disallowing interest expenses related to investment in shares. 3. Consideration of business activities and genuine purpose for interest payments. Issue 1: Disallowance of Interest Expenses: The case involved the disallowance of interest expenses amounting to ?30 lakhs under section 36(1)(iii) of the IT Act by the Assessing Officer (AO). The AO disallowed the interest expenses as the assessee failed to establish the nexus of interest-bearing loans taken and the genuineness of the claim of interest expenses for business purposes. The AO noted that a significant amount of loan was used for investments not yielding any income, leading to the disallowance. Issue 2: Justification for Disallowing Interest Expenses: The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the interest payment of ?30 lakhs was not for any genuine business activity. The CIT(A) observed that the company's financial activities did not justify the interest payment, considering the huge share capital and disclosed loss. The CIT(A) emphasized that the interest expenses were not related to any legitimate business purpose, leading to the affirmation of the disallowance. Issue 3: Business Activities and Genuine Purpose: In the appeal before the Tribunal, the assessee argued that the interest paid was exclusively for earning interest income as part of its finance and investment business. The assessee highlighted the inclusion of interest income in taxable income and the absence of borrowed funds for share investments. The Tribunal considered the submissions, noting the company's business nature and the interest income earned against expenses. Relying on relevant legal precedents, including a decision of the Delhi High Court, the Tribunal held that no disallowance of interest was warranted in the case. The Tribunal directed the AO to delete the addition of interest expenses, ultimately allowing the appeal filed by the assessee. This detailed analysis outlines the issues concerning the disallowance of interest expenses under section 36(1)(iii) of the IT Act, the justification for disallowing such expenses related to investments in shares, and the assessment of the business activities and genuine purpose behind the interest payments. The judgment provides a comprehensive overview of the arguments presented by both parties, the decisions of the AO and CIT(A), and the final ruling of the Tribunal based on legal principles and precedents.
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