2022 (10) TMI 1026 - AT - Income Tax

Disallowance u/s 36(1)(iii) - amount advanced by the assessee on which no interest has been charged by the assessee - DR submitted that the amount has been advanced from the assessee s cash credit bank account and it is thus evident that there is a direct nexus between interest bearing funds - HELD THAT - Where the deposits are more than the withdrawals on a given day and such excess deposits are utilised by the assessee for the purpose of making any loans and advances, no interest would be charged by the bank as the assessee would in effect be using its own funds at the given point of time - nature of deposits in such cash credit account needs to be examined as to whether the deposits are from business operations or there are also deposits by way of fund transfer from other bank accounts and the nature of such funds from other bank accounts in the nature of borrowings or from business operations. In case of borrowed funds have been transferred to this particular cash credit account and such funds are then utilized in giving loans and advances, again a nexus is established between the borrowed funds and the loans/advances. In our view, this particular aspect of the matter in terms of nature and movement of funds in the cash credit account through which the advances have been given to M/s Mirage Infrastructure Private Limited has not been examined by either of the lower authorities. Merely because the advances were given from assessee s cash credit account, a simplistic presumption cannot be drawn that advances were from borrowed funds given that the cash credit account is likely to have credits/deposits from assessee s business operations and/or other bank accounts. The credits and withdrawals in such cash credit account need to be examined and a clear nexus is required to be established between the borrowed funds and making of loans/advances to M/s Mirage Infrastructure Private Limited. On the same footing, the argument of the assessee regarding availability of its own funds need to be tested and examined after analyzing the nature and position of funds at the relevant point of time of making such advances. We, therefore, deem it appropriate to remand the matter to the file of the AO to examine this matter afresh in light of above discussions. AO shall provide reasonable opportunity to the assessee and the latter shall submit the desired information/documentation as so desired by the AO. Ground of appeal is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961 based on the assessment order.
2. Justification of sustaining the disallowance by the Commissioner of Income Tax (Appeals) regarding the interest expenditure.
3. Nexus between interest-bearing funds and the amount advanced by the assessee.
4. Examination of movement of funds in the cash credit account.
5. Remand of the matter to the Assessing Officer for further examination.

Analysis:
1. The appeal was filed against the order disallowing a sum under Section 36(1)(iii) of the Act. The Assessing Officer noted discrepancies in the advance for capital goods given during the relevant year. The AO found a direct nexus between interest-bearing funds and the advances made, resulting in the disallowance of Rs. 4,04,200.

2. The Commissioner of Income Tax (Appeals) upheld the disallowance, emphasizing the onus on the assessee to establish a nexus between the advances and business purposes. The CIT(A) found no proof of a connection between interest-free loans given and interest-free funds available. The assessee's explanations were deemed insufficient, leading to the sustained disallowance.

3. The Tribunal observed that both lower authorities agreed on the utilization of interest-bearing funds for the advances. However, the Tribunal noted the absence of a detailed examination of the movement of funds in the cash credit account. The Tribunal highlighted the need to establish a clear nexus between borrowed funds and the loans/advances given.

4. The Tribunal emphasized the importance of analyzing the nature and movement of funds in the cash credit account to determine the source of the advances. The Tribunal pointed out that a simplistic presumption of advances from borrowed funds based on the cash credit account alone is insufficient. A thorough examination of the funds' nature and origin is essential to establish a valid connection.

5. Consequently, the Tribunal allowed the appeal for statistical purposes and remanded the matter to the Assessing Officer for a fresh examination. The AO was directed to provide the assessee with a reasonable opportunity to submit the necessary information and documentation for further assessment based on the discussions and considerations outlined in the judgment.