2024 (4) TMI 93 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - interest charged @ 12% of average advance outstanding - advances given to director - nexus between the advance given to the Director and the business of the assessee - admission of additional evidences - assessee held that there was no nexus between the advances given and the business of the assessee - whether the assessee had availability of sufficient interest free funds with it, as on the dates on which funds were advanced by it to Shri Harpal Singh, Director? HELD THAT - Such availability of funds can be ascertained on documentary evidence, which is proved on record unrebutted. We are of the considered opinion that the statement of bank account of the assessee for Financial Year 2013-14, relevant to the year under consideration, i.e., assessment year 2014-15, the assessee's Annual Tax Statement in Form 26AS for the year under consideration, the ledger of Director in assessee's books, the capital account of Director in the books, the partnership firm where director Shri Harpal Singh was a partner, the Partnership Deed, the PAN of Partnership firm and the assessee's balance sheet for assessment year 2014-15, are required to be adduced as evidence, and the Form 26AS would show the veracity of the assessee's contention that it had received Income Tax refund on 21.12.2013, as contended. Transfer of such refund to partnership firm would also be reflected in the bank statement. The factum of Director, being a partner in partnership firm would be evincible from the Partnership Deed and PAN Card of partnership firm Perusal of the bank statement would also divulge as to whether the funds were given out from the debit balance or the credit balance in the bank account and would also allow ascertainment of the truthfulness or otherwise of the assessee's contention that its bank account is devoid of drawing power and it maintains a credit balance and that the interest rate charged is zero . Still further, the ledger of Harpal Singh Capital Account in the books of M/s Synergy Thrislington would show as to whether indeed interest free funds were credited in the capital account in instalments, or not. In fact, the perusal of the partner s capital account juxta-posed with the assessee's account would evince the flow of funds, i.e., debits and credits. The alleged payment on behalf of Director to the firm would also be evincible from the ledger of director in the books of the assessee. Too, the availability of interest free funds with the assessee at the relevant time can very well be ascertained from the balance sheet of the assessee. Since these documents were not made available by the assessee before either of the authorities below, finding these documents to be very material and relevant for adjudicating the matter, as discussed herein above, we deem it appropriate to restore the issue to the AO to verify the correctness and authenticity of these documents, produced for the first time before us and to adjudicate the issue afresh after providing adequate opportunity of being heard to the assessee. This is entirely in keeping with the decision of the Third Member of the Tribunal in the case of Char Bhai Biri Works Vs ACIT , 2003 (3) TMI 316 - ITAT PUNE Therein, the assessee filed certain additional evidence before the Tribunal for consideration. It was stated that some of the papers might have already been given to the Revenue authorities, but since details were not available, all those papers should be treated as additional evidence. Those documents were found to be very material and relevant for adjudicating the matter. Since those documents were not available with the AO and were produced before the Tribunal for the first time, it was held that the issue was to be restored to the file of the AO to verify the correctness and authenticity of such documents, and also to adjudicate the gross profit issue afresh after providing adequate opportunity to the assessee of being heard and looking into comparable cases. In the present case, we are alive to the fact that the best evidence in the shape of the account statement was not produced by the assessee before the authorities below. However, as discussed we have found the afore-enumerated documents, including the bank statement of the assessee, to be very material and relevant for adjudicating the matter in a just and proper manner. It is, therefore, that exercising our powers under Rule 29 of the ITAT Rules, that we are ordering all these documents to be adduced in evidence. Thus the matter is remanded to the file of the AO to verify the correctness and authenticity of the documents discussed and to provide adequate opportunity of hearing to the assessee with regard thereto and to re-adjudicate the matter. Ordered accordingly. Appeal allowed for statistical purposes.

Issues Involved:

1. Disallowance of interest u/s 36(1)(iii) of the Income Tax Act, 1961.
2. Nexus between advances given to the Director and the business of the assessee.
3. Availability of interest-free funds with the assessee.
4. Admission of additional evidence.

Summary:

1. Disallowance of interest u/s 36(1)(iii) of the Income Tax Act, 1961:

The assessee challenged the order confirming the disallowance of interest of Rs. 75,75,208/- u/s 36(1)(iii) made by the AO. The AO disallowed interest on the grounds that the assessee did not have sufficient liquid funds to make advances to the Director and had raised further loans during the year. The ld. CIT(A) confirmed the disallowance, stating that the assessee could not explain the business purpose for the advances and had not discharged its onus to prove that the borrowed funds were utilized for business purposes.

2. Nexus between advances given to the Director and the business of the assessee:

The AO held that the assessee could not prove any nexus between the advance given to the Director and the business of the assessee. The assessee contended that the advance was given out of commercial expediency, but the AO found no interest-free funds available and that interest-bearing funds had been borrowed during the year.

3. Availability of interest-free funds with the assessee:

The assessee argued that it had sufficient interest-free funds available, including share capital and reserves, and that the advances were made out of these funds. The assessee sought to place additional evidence on record, including bank statements and other financial documents, to support its claim. The Tribunal found these documents to be very material and relevant for adjudicating the matter and decided to restore the issue to the AO to verify the correctness and authenticity of these documents.

4. Admission of additional evidence:

The Tribunal allowed the admission of additional evidence, stating that the availability of funds can be ascertained on documentary evidence. The Tribunal cited various cases, including "S.A. Builders Ltd. Vs CIT(Appeals), Chandigarh" and "Vaman Prestressing Co. (P) Ltd. Vs Addl. Commissioner of Income Tax," to support the principle that if there are sufficient interest-free funds available, it can be presumed that the investments were made out of these funds. The Tribunal remanded the matter to the AO to verify the additional documents and re-adjudicate the issue after providing an adequate opportunity of being heard to the assessee.

Conclusion:

The appeal was treated as allowed for statistical purposes, and the matter was remanded to the AO for fresh adjudication based on the additional evidence provided by the assessee.

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