2022 (4) TMI 1318 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - assessee has submitted that the aforesaid sale got forfeited since Kadam did not pay the balance amount and the property in question was later sold to third party - Whether amount due from Kadamb was not outstanding sale price but loans advances so that interest was incurred for non-business purposes and as such it was not admissible? - HELD THAT - The assessee has not placed on record any agreement for sale entered with Kadam or any further correspondences in support of his averments. While, in principle, we are in agreement with Ld. Counsel for the assessee that if no amount has been advanced to Kadam, then merely on basis of mistakenly showing the above sum under the head loans and advances instead of trade receivables section 36(1)(iii) of the Act cannot be invoked. In absence of supporting documents, we are inclined, in the interests of justice, to restore the file to AO to verify whether in the present case, the assessee has in fact, not advanced any money to Kadam as asserted and the sum merely represents a mere journal entry, which has been incorrectly reflected under the head loan and advances , while it should have been accounted for as Trade Receivables . And if that be the case, then in our view, no disallowance of interest u/s 36(1)(iii) of the Act is called for, merely on account of mistaken accounting treatment, when on facts, no advance has been given. Appeal of assessee allowed.

Summary

Issues:
Appeal against disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act for Assessment Year 2014-15.

Analysis:
1. The Assessing Officer noted interest-free loans given by the assessee and interest-bearing loans taken during the year. The AO sought explanations regarding the utilization of interest-bearing funds for interest-free advances. The AO disallowed interest expenses of ?18,84,000 on the opening balance of these advances under section 36(1)(iii).

2. The CIT(A) upheld the disallowance, stating that interest expenses must be incurred wholly and exclusively for business purposes to be allowable. The CIT(A) observed that since the borrowed funds were diverted for non-business purposes, the disallowance was justified. Citing case laws, the CIT(A) confirmed the disallowance under section 36(1)(iii).

3. The assessee contended that the outstanding amount represented the unpaid sale price of land sold in previous years, mistakenly shown as loans and advances instead of trade receivables. The appellant argued that no cash outflow occurred, and no interest-free advances were given, thus no disallowance was warranted.

4. The ITAT found that no interest-free advances were given, and the amount in question was a journal entry mistakenly categorized as loans and advances. Lack of evidence regarding the sale transaction with Kadam led the ITAT to direct the AO to verify if no advance was made to Kadam, restoring the file for further examination.

5. The ITAT allowed the appeal, emphasizing the importance of verifying whether any advance was actually made to Kadam. If no advance was given, the disallowance under section 36(1)(iii) was deemed unwarranted. The case was remanded to the AO for verification.

In conclusion, the ITAT allowed the appeal, directing the AO to verify the actual transactions with Kadam to determine the applicability of the disallowance under section 36(1)(iii) of the Income Tax Act.