2022 (7) TMI 57 - AT - Income Tax

Proportionate disallowance of interest on ad hoc basis after noting that assessee had both interest bearing funds and interest free funds at his disposal - HELD THAT - We note that the disallowance has been made on ad hoc basis on the plank that interest bearing funds have been diverted. This was done by the AO despite noting that assessee had interest bearing funds as well as interest free funds. It is settled law that if assessee has sufficient interest free funds the right of attribution lies with the assessee and AO cannot insist upon one to one nexus between the funds. This view is duly corroborated by Hon ble Mumbai High Court in the case of CIT vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . This aspect needs to be considered by the AO in making the disallowance which has not been done. Authorities below have shown that there is abnormal increase in sale to related parties, hence the debt is not normal. In our considered opinion, this plank is not acceptable as Revenue authorities are accepting the sales and no disallowance has ever been done in this regard. Moreover, the genuineness of the debtors cannot be doubted without any enquiry in this regard. In this view of the matter, in our considered opinion, the matter needs to be remitted back to AO. AO is directed to decide the issue afresh in the light of our observation herein above. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of 50% of interest expenses on loans received for working capital.
2. Disallowance of loan given to sister concern as a trade debt without proving business expediency.

Issue 1: Disallowance of 50% of interest expenses on loans received for working capital:
The Assessing Officer (AO) made a proportionate disallowance of interest on an ad hoc basis due to the presence of both interest-bearing and interest-free funds with the assessee. The AO concluded that the loans given to related parties were non-business and provided out of both interest-bearing and interest-free funds. Consequently, 50% of the interest expenses claimed by the assessee were disallowed. The CIT (A) confirmed this addition, noting the history of similar disallowances in previous years. The CIT (A) highlighted the significant increase in trade receivables and bank loans, questioning the utilization of funds and the nature of the trade debt with a related party. However, the ITAT Delhi held that the AO's disallowance was made without considering the settled law that allows the assessee the right of attribution when having sufficient interest-free funds. The ITAT also disagreed with the abnormal increase in sales to related parties as a basis for disallowance, emphasizing the need for a proper inquiry. Consequently, the ITAT directed the AO to re-examine the issue in light of their observations.

Issue 2: Disallowance of loan given to sister concern as a trade debt without proving business expediency:
The AO and CIT (A) raised concerns about the loan given by the assessee to a sister concern, treating it as a trade debt without proving business expediency. The AO noted that the trade debt with the sister concern exceeded the total sales, indicating a potential diversion of funds. The CIT (A) emphasized the lack of explanation regarding the utilization of bank loans and cash credit facilities. However, the ITAT disagreed with the conclusions drawn by the lower authorities, stating that the abnormal increase in sales to related parties did not warrant disallowance without proper investigation. The ITAT highlighted the need for a comprehensive assessment of the business expediency of the transaction and directed the AO to re-evaluate the issue.

In conclusion, the ITAT Delhi allowed the assessee's appeal for statistical purposes, directing the AO to re-examine both issues concerning the disallowance of interest expenses and the treatment of the loan to the sister concern as a trade debt. The judgment emphasized the importance of considering the assessee's right of attribution in utilizing funds and the necessity of conducting a thorough inquiry before making disallowances.