2024 (11) TMI 531 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) on interest-free loans given by the assessee - HELD THAT - A perusal of the Balance Sheet of the assessee shows that the opening capital as on 01.04.2017 is Rs. 4,36,06,730.78 whereas the assessee has given interest free loans / advances of only Rs. 94,70,000/-. Hon'ble Supreme Court in the case of South Indian Bank Ltd 2021 (9) TMI 566 - SUPREME COURT has held that when the assessee having sufficient interest free funds of their own greater than the investments, proportionate disallowance of interest paid is not called for. As in the case of CIT vs. Reliance Utilities Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that if there were funds available both interest free and overdraft and / or loans taken, then a presumption would arise that the investment would be out of interest free funds generated or available with the company, if the interest free funds are sufficient to meet the investments and accordingly upheld the decision of the Tribunal in deleting the disallowance. Since in the instant case also, the assessee has sufficient own capital which is much more than the amount of interest free loans given to the various parties, therefore, no disallowance of interest u/s 36(1)(iii) is called for. The first issue raised by the assessee in the grounds of appeal is accordingly allowed. Disallowance of proportionate interest - A perusal of the assessment order shows that the assessee has given interest on unsecured loans to the various parties ranging from 17% to 23%. While the AO has not doubted the unsecured loans, however, he has restricted such interest to 15% and thereby made the addition of Rs. 4,55,190/- being the excess interest paid. We find for assessment year 2016-17 the case was reopened, inter-alia the high interest expenses relatable to the exempt income and high interest expenses and low turnover. We find the AO in the order passed u/s 143(3) of the Act has not made any such disallowance. Similarly, for assessment years 2014-15 and 2017-18 also, no such disallowance has been made by the AO in the orders passed u/s 143(3) of the Act on account of excess interest paid. Therefore, following the rule of consistency itself, we are of the considered opinion that no disallowance of interest is called for. The second issue raised by the assessee in the grounds of appeal is accordingly allowed.

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) on interest-free loans given by the assessee.
2. Disallowance of excess interest paid on unsecured loans.

Analysis:

*Issue 1: Disallowance of interest under section 36(1)(iii) on interest-free loans given by the assessee*

The Assessing Officer disallowed an amount of Rs. 6,25,496/- as interest on unsecured loans given without charging any interest to four individuals. The CIT(A) upheld this disallowance. However, the Tribunal allowed the appeal, citing that the assessee's own capital exceeded the amount of interest-free loans given, following the principle established in case laws such as CIT vs. Reliance Utilities Ltd. and South Indian Bank Ltd. The Tribunal held that no disallowance under section 36(1)(iii) was justified in this case.

*Issue 2: Disallowance of excess interest paid on unsecured loans*

The Assessing Officer made an addition of Rs. 4,55,190/- as excess interest paid on unsecured loans by the assessee. The CIT(A) confirmed this disallowance. However, the Tribunal allowed the appeal on this issue as well. The Tribunal noted that the Assessing Officer had restricted the interest rate on unsecured loans to 15%, despite the assessee paying interest ranging from 17% to 23%. The Tribunal observed that no such disallowance was made in previous assessment years and emphasized the consistency principle. Therefore, the Tribunal held that no disallowance of interest was warranted in this case.

In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside both the disallowance of interest under section 36(1)(iii) and the disallowance of excess interest paid on unsecured loans. The Tribunal's decision was based on the adequacy of the assessee's own capital compared to the interest-free loans given and the lack of justification for restricting the interest rate on unsecured loans.